/," Morgan, Lewis & Bockius LLP \ X n ^ ^ T ,701 Market Street JVlDIgan LCWlS Philadelphia. PA 19103-2921 C O U N S E L O R S A T L A W Tel: 215.963.5000 Fax: 215.963.5001 www.morganlewis.com
Anthony C DeCusatis Of Counsel 215.963.5034 adecusatis@MorganLewis com
August 26, 2010
VIA FIRST CLASS MAIL
Rosemary Chiavetta, Secretary Pennsylvania Public Utility Commission Commonwealth Keystone Building 400 North Street P.O. Box 3265 Harrisburg, PA 17105-3265
Re: Pennsylvania Public Utility Commission v. Pennsylvania-American Water Company - Northeast Wastewater Operations DocketNo. R-2010-2166214
Dear Secretary Chiavetta:
Enclosed for filing is a Certificate of Service (original and three copies) evidencing service ofthe Rebuttal Testimony and Exhibits of Pennsylvania-American Water Company, Northeast Wastewater Operations, upon the parties of record.
Very truly yours,
^^^+W^ C. i V C j i a i ^ cV
Anthony C. DeCusatis
ACD/tp Enclosures
cc: Per Certificate of Service
RECEIVED Seth A. Mendelsohn AU5 2 6 ZOIO
Philadelphia Washington New York Los Angeles San Francisco Miami Pittsburgh Princeton Chicago Minneapolis Palo Alto Dallas Houston Harrisburg Irvine Boston Wilmington London Paris Brussels Frankfurt Beijing Tokyo
OBI/65536673-1
BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION
PENNSYLVANIA PUBLIC UTILITY COMMISSION
v.
PENNSYLVANIA-AMERICAN WATER COMPANY - Northeast Wastewater Operations
DOCKETNO. R-2010-2166214
CERTIFICATE OF SERVICE
I hereby certify and affirm that I have this day served copies ofthe Rebuttal
Testimony and Exhibits on behalf of Pennsylvania-American Water Company upon the
following persons in the matter specified in accordance with the requirements of 52 Pa. Code §
1.54:
VIA ELECTRONIC MAIL AND FEDERAL EXPRESS
The Honorable Charles E. Rainey, Jr. Administrative Law Judge Pennsylvania Public Utility Commission Office of Administrative Law Judge 801 Market Street, Suite 4063 Philadelphia, PA 19107 crainev(5istate.pa.us
Dianne E. Dusman, Esquire Senior Assistant Consumer Advocate Shawn A. Sparks, Esquire Assistant Consumer Advocate Office of Consumer Advocate Forum Place, 5lh Floor 555 Walnut Street Harrisburg, PA 17101-1923 [email protected] SSparks(a),paoca.ortz Counsel for Office of Consumer Advocate
AUG 2 6 2010
PA PUBLIC UTILITY COMMISSION SECRETARY'S BUREAU
OB 1/65536772.
Charles Daniel Shields, Esquire Carrie B. Wright, Esquire Pennsylvania Public Utility Commission Office of Trial Staff P. O. Box 3265 Harrisburg, PA 17105-3265 cshields(a),statc.pa.us carwri ghttojstate.pa. us Counsel for Office of Trial Staff
Date: August 26, 2010 c ^ K C t K ^ v w ^ ^ X ^ ^ 0 ^ C<A
Thomas P. Gadsden (Pa. No. 28478) Anthony C. DeCusatis (Pa. No. 25700) Catherine G. Vasudevan (Pa. No. 210254) Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103-2921 Phone: 215.963.5234 Fax: 215.963.5001 E-mail: [email protected]
Counsel for Pennsylvania-American Water Company
Dm/65536772.t
PAWC STATEMENT NO. 2-R
PENNSYLVANIA-AMERICAN WATER COMPANY
(NORTHEAST WASTEWATER OPERATIONS)
DOCKET NO. R-2010-2166214
REBUTTAL TESTIMONY OF
DAVID R. KAUFMAN
CONCERNING CAPACITY NEEDS OF THE BLUE MOUNTAIN AND LEHMAN PIKE
WASTEWATER SYSTEMS
AUGUST 26, 2010 AUG 2 6 2010
PA PUBLiC UTIUTY CUWSh/liSSiON
SECRETARY'S BUHLAU
1 REBUTTAL TESTIMONY 2 OF 3 DAVID R. KAUFMAN 4 5 6 7 I. INTRODUCTION AND PURPOSE OF TESTIMONY
8 1. Q. Please state your name and business address.
9 A. My name is David R. Kaufman. My business address is 800 West Hershey
10 Park Drive, Hershey, PA 17033.
11 2. Q. Have you previously submitted testimony in this proceeding?
12 A. Yes. 1 submitted PAW Statement No. 2, which includes a statement of my
13 experience and qualifications.
14 3. Q. What is the purpose of your testimony?
15 A. The purpose of my rebuttal testimony is to respond to the direct testimony of
16 OCA witness Scott J. Rubin concerning allegations of excess capacity
17 associated with wastewater treatment plant capital improvement projects in
18 the Blue Mountain and Lehman Pike Wastewater systems (Northeast
19 Wastewater Operations).
1 IL OVERVIEW
2 4. Q. Please provide an overview of the principal facts that will frame the issues
3 and provide the necessary context.
4 A. The key points arc summarized beiow and explained further later in this
5 statement:
6 Blue Mountain Wastewater Treatment Plant
7 • The Company had to substantially upgrade the Blue Mountain Wastewater
8 Treatment Plant. The plant was at the end of its life when the Company
9 acquired the Blue Mountain system in 2005. As I explained in my direct
10 testimony, the plant was in poor condition, was experiencing numerous
11 failures of key process units and could not reliably meet National Pollutant
12 Discharge Elimination System (NPDES) effluent standards.
13 Consequently, the plant had to be substantially rebuilt, even without
14 regard to the fact that it was in a projected hydraulic overload condition, as
15 I explain below.
16 • The treatment plant was in a ''projected hydraulic overload" condition at
17 the time PAW acquired the Blue Mountain Wastewater system. This
18 regulatory designation indicates that the current wastewater treatment
19 plant capacity will be exceeded within a five-year time frame. Under
20 these conditions, the facility's permittee (PAW) must take appropriate
21 corrective action to prevent an actual hydraulic overload from occurring at
22 the plant.
2
1 o The Company is currently upgrading the outdated and failing treatment
2 process units and expanding the treatment capacity from 135,000 gallons
3 per day (gpd) to 183,000 gpd to meet the projected needs of developments
4 within the Blue Mountain community, consistent with regulatory
5 guidelines. Pa. DEP would not have permitted the necessary upgrades to
6 the wastewater treatment plant without increasing the plant capacity to
7 meet projected growth needs of this community.
8 • The Company is responsible for providing capacity at its Blue Mountain
9 Wastewater Treatment Plant to meet the projected sewage needs
10 associated with signed Planning Modules for new development activity in
11 the Blue Mountain service territory. This is not excess capacity as Mr.
12 Rubin contends.
13 Lehman Pike Wastewater Treatment Plant
14 • The upgrade ofthe Lehman Pike Wastewater Treatment Plant focused on
15 rehabilitation and re-use ofthe plant's existing facilities. No increase in
16 capacity resulted from these capital improvements.
17 • At the time PAW acquired the Lehman Pike system, the plant, at its
18 current capacity, has been recognized in rate base as fully used and useful.
1 HI. RESPONSE TO MR. RUBIN
2 5. Q. Briefly summarize the condition of the existing Blue Mountain
3 Wastewater Treatment Plant since the acquisition by PAW.
4 A. When the Blue Mountain Lake Wastewater system was purchased by PAW on
5 October 31, 2005, the existing Rotating Biological Contactor (RBC) treatment
6 equipment was in poor condition and was at the end of ils expected useful life.
7 The RBC process units have failed on more than 10 separate occasions since
8 acquisition. In addition to the failing RBC units, the existing primary and
9 secondary clarifiers operate poorly during periods of higher than normal
10 flows, which compromises the effluent qualify ofthe treatment plant. Finally,
11 the plant has been in a projected hydraulic overload condition since the time
12 of acquisition.
13 6. Q. Why did the Company pursue an upgrade and expansion to the Blue
14 Mountain facility?
15 A. The decision to replace the existing Rotating Biological Contactor (RBC)
16 treatment system with a new Sequencing Batch Reactor (SBR) system was
17 influenced by several factors. To continue to provide reliable wastewater
18 service, the RBC system would have needed a very costly complete
19 replacement. The existing RBC treatment process could not reliably meet the
20 effluent limitations ofthe existing National Pollutant Discharge Elimination
21 System (NPDES) permit and was not capable of meeting pending nutrient
22 effluent limitations required by the Delaware River Basin Commission
1 (DRBC) for Nitrate-Nitrite Nitrogen (9.5 mg/L) and total Phosphorus (2.0
2 mg/L) without making significant modifications and additions to the process.
3 Finally, based on projected sewage flows over the next five years from the
4 developments within the Blue Mountain community, the existing wastewater
5 treatment capacity of 135,000 galions per day was projected to be exceeded.
6 The failures ofthe existing RBC system in conjunction with the hydraulic
7 limitations ofthe primary and secondary clarifiers, the inability ofthe existing
8 system to meet NPDES permit effluent limitations, and the need for additional
9 capacity prompted PAW to consider alternatives to the outdated RBC process.
10 It was ultimately determined that the best solution would be to replace the
11 existing RBC process with a new Sequencing Batch Reactor (SBR) process.
12 The SBR system would not only eliminate the failing RBC's and the
13 problematic primary and secondary clarifiers, but would also be capable of
14 meeting the pending nutrient effluent requirements.
15 7. Q. Please explain the consequences of the "projected hydraulic overload
16 condition" for the Blue Mountain system.
17 A. Since the time of acquisition, the Blue Mountain Wastewater Treatment Plant
18 has been in a projected hydraulic overload condition based upon existing
19 sewage flows and signed planning modules, pursuant to Act 537, for
20 residential developments within the Blue Mountain community. The
21 adequacy of sewage facilities is determined in part by current and projected
22 sewage flows. Planning Modules that were signed by the former owners of
23 the Blue Mountain system, and approved by the municipality and Pa. DEP,
5
1 obligated the Company to provide for the projected capacity needs of new
2 development activity. A projected hydraulic overload condition exists when
3 the sewage facilities are projected to become hydraulically overloaded within
4 the next five years, based upon known development projects and applicable
5 sewage needs projections. In the case ofthe Blue Mountain Wastewater
6 Treatment Plant, the projected average daily flow rate for year 2014 is
7 137,000 gallons per day; (Kaufman response to MSG 17-9) which will exceed
8 the current plant capacity of 135,000 gpd. Therefore, because the plant will
9 not have adequate capacity four years from now, the plant is in a projected
10 hydraulic overload condition. The corrective action that was taken consisted
11 of constructing additional capacity to meet the projected growth needs.
12 Infiltration and Inflow (I&I) levels are extremely low in the Blue Mountain
13 system and had no impact on plant sizing requirements.
14 8. Q. What is PAW's responsibility, as a treatment provider, to make
15 conveyance and treatment capacity available?
16 A. In conformity with the requirements of Title 25, Chapter 94 (relating to
17 Municipal Wasteload Management) ofthe Pa. DEP's regulations, signing
18 Planning Modules for the equivalent dwelling units ("EDUs") in new
19 developments certifies that the additional flows can be collected, conveyed
20 and treated at the Company's wastewater treatment plant in compliance with
21 regulatory permits and that capacity is available so that the projected new
22 development will not create a hydraulic or organic overload within a five-year
23 horizon. In essence, when Planning Modules are signed for new development,
6
1 capacity is allocated to serve the projected new customers. PAW is obligated
2 to handle the future sewage flows at the Company's Blue Mountain
3 Wastewater Treatment Plant based on signed Planning Modules for
4 development within the Blue Mountain service territory.
5 9. Q. Mr. Rubin states that the existing plant capacity would not be exceeded in
6 five years (Rubin page 11, line 7 and 8). fs he correct?
7 A. No. Mr. Rubin references my response to Interrogatory OCA 30-10, which
8 states, as described above, that the existing wastewater treatment plant
9 capacity would be exceeded within the next five years.
10 10. Q. What considerations were given when sizing the plant expansion?
11 A. Although the downturn on the economy has slowed the increase in sewage
12 flow, the plant remains in a projected hydraulic overload, with the existing
13 capacity of 135,000 gpd projected to be exceeded by year 2014. Pursuant to
14 Pa. DEP guidelines, the design flow for a proposed plant expansion should be
15 based on historical flows plus the additional projected flow due to future flow
16 contributions during the design period ofthe plant. Pa. DEP's Domestic
17 Wastewater Facilities Manual indicates that plant upgrades should have an
18 approximate 20-year planning horizon. Act 537 planning intervals are
19 typically at least ten years. The plant's NPDES permit has been based on a
20 maximum discharge rate into the receiving stream of 275,000 gpd. Based on
21 guidance from Pa. DEP, the capacity upgrade had to meet the build-out needs
22 ofthe developments within the Blue Mountain service territory and was sized
7
1 accordingly at 183,000 gpd. Given the modular nature ofthe SBR process
2 units, this capacity would also equate to 2/3 ofthe maximum permitted
3 NPDES discharge rate. Pa. DEP also allowed the Company to use a reduced
4 unit flow rate of 200 gpd for future EDUs, which is comparable to existing
5 actual unit flow rates. This was permitted by Pa. DEP only because they
6 knew that, with the design chosen by the Company, the third modular
7 treatment process unit could be readily added if flows increased in the future.
8 11. Q. Is it your opinion that all of the Blue Mountain facilities will be used and
9 useful by the end of 2010?
10 A. Yes. All components ofthe 183,000 gpd expanded Blue Mountain plant will
11 be in use and be providing wastewater service to customers in the Blue
12 Mountain wastewater service territory by December 31, 2010.
13 12. Q. Why did the Company pursue an upgrade and expansion to the Lehman
14 Pike Wastewater Treatment Plant facility?
15 A. Steel tankage and piping systems associated with treatment process units were
16 in poor condition and needed to be rehabilitated. Updated process control and
17 monitoring equipment was installed together with more efficient pumps and
18 blowers. Additionally, an old chlorine gas disinfection system was replaced
19 with a new liquid chlorine disinfection system.
20 13. Q. Was the capacity of the Lehman Pike Wastewater Treatment Plant
21 changed as a result ofthese capital improvements?
1 A. No.
2 14. Q. At the time of acquisition by PAW, were all of the Lehman Pike facilities
3 considered used and useful?
4 A. Yes, it is my understanding that they were and had been reflected in the rate
5 base ofthe prior owner.
6 15. Q. Do you agree with Mr. Rubin that the Lehman Pike facilities are not fully
7 "used and useful" in providing utility service to present customers (Rubin
8 page 5, Line I) .
9 A. No. All components ofthe Lehman Pike Wastewater Treatment Plant arc
10 both used and useful in providing wastewater service to customers in the
11 Lehman Pike service territory.
12 CONCLUSION
13 16. Q. Does this conclude your testimony?
14 A. Yes.
PAWC STATEMENT NO. 3-R
REBUTTAL TESTIMONY OF
ROD P. NEVIRAUSKAS
WITH REGARD TO
PENNSYLVANIA AMERICAN WATER
NORTHEAST WASTEWATER OPERATIONS
REVENUE DEFICIENCY SUMMARY, UTILITY PLANT ACQUISITION ADJUSTMENT,
AVAILABILITY CHARGES, O&M EXPENSES, INCOME TAXES, RATE OF RETURN, CUSTOMER
ASSISTANCE PROGRAM, AND PHASE-IN OF RATES.
DOCKET NO. R-2010-2166214
DATE: August 26, 2010
RECEIVED AUG 2 6 ZC10
PA PUBLIC ifnUTY COMMISSION
SECps ^ V S BUREAU
TABLE OF CONTENTS
Page
f. TNTRODUCTION I
II. THE COMPANY'S REVISED STATEMENT OF REVENUE REQUIREMENT 2
III. COMPANY ADJUSTMENTS 3
IV. OTS AND OCA ADJUSTMENTS ACCEPTED 4
V. ADJUSTMENTS CONTESTED 6
A. Negative Acquisition Adjustment 7
B. Availability Charges 8
C. Salary and Wages 9
D. Purchased Power Expense 10
E. Rate Case Expense 11
F. Capital Structure 11
G. Phase-In 12
H. Customer Assistance Program 12
I. Property Tax Adjustment 13
VI. CONCLUSION 13
1 REBUTTAL TESTIMONY 2 OF 3 ROD P. NEVIRAUSKAS
5 I. INTRODUCTION
6 1. Q. Please state your name, occupation and business address.
7 A. My name is Rod P. Nevirauskas and my business address is 800 West Hersheypark
8 Drive, Hershey, Pennsylvania 17033.1 am the Director of Rates and Regulations
9 for Pennsylvania American Water ("PAW").
10 2. Q. Have you submitted any other testimony in this proceeding?
11 A. Yes, I submitted PAWC Statement No. 3, which includes a statement of my work
12 experience and qualifications.
13 3. Q. What is the purpose of your testimony?
14 A. The purpose of my rebuttal testimony is as follows;
15 1) To provide the Company's revised statement of revenue requirement in this
16 proceeding, as set forth in Exhibit 3-A-Revised.
17 2) To detail the Company's adjustments to its claimed revenue requirement and lo
18 acknowledge the Company's acceptance of several adjustments proposed by
19 witnesses for the Office of Trial Staff ("OTS") and Office of Consumer
20 Advocate ("OCA")
1 3) To detail and address the proposed adjustments by the opposing parties that the
2 Company is not accepting.
3 IL THE COMPANY'S REVISED STATEMENT 4 OF REVENUE REQUIREMENT
5 4. Q. Has the Company made any revisions to its revenue requirement claim in this
6 proceeding?
7 A. Yes, it has. The Company has accepted various adjustments proposed by the
8 opposing parties in this case which serve to reduce the revenue requirement
9 originally requested by the Company. In addition, PAW has decided to propose a
10 rate phase-in plan similar to the rate phase-in plan recommended by the OTS.
11 5. Q. Has the Company prepared a revised statement of its revenue requirement?
12 A. Yes, it has. PAWC Exhibit 3-A-Revised presents the Company's updated revenue
13 requirement claim in this proceeding. It incorporates the changes explained in my
14 rebuttal testimony, as well as revisions to the Company's originai claims as
15 previously supplied in interrogatory responses and the acceptance of certain
16 adjustments proposed by other parties. Each page of Exhibit 3-A Revised that has
17 been revised from the original Exhibit 3-A carries the designation "R" following the
18 page number. In addition, a summary ofthe revisions is provided as the first page
19 of Exhibit 3-A-Revised, which sets forth: (I) a brief description ofthe revision; (2)
20 the page of Exhibit 3-A to which it relates; (3) a reference to where the revision has
21 been identified or discussed in an interrogatory response or testimony; (4) the
22 Company's original claimed amount; (5) the Company's revised claim; and (6) the
1 net change between the original and revised claim. The result ofthese revisions is a
2 proposed revenue increase of $1,886,639, in lieu ofthe $2,099,490 increase
3 originally requested by the Company.
4 UI. COMPANY ADJUSTMENTS
5 6. Q. Please identify and explain the Company adjustments that have been reflected
6 in Exhibit 3-A Revised.
7 A. The Company adjustments consist ofthe following:
8 Cash Working Capital
9 Expense Lag - The Company has eliminated rate case amortization from its cash
10 working capital calculations.
11 Amortization of Net Salvage - The Company has reflected in its revised revenue
12 requirement a 10 year amortization ofthe removal costs associated with the
13 treatment facilities in Lehman Pike (Saw Creek) and Blue Mountain wastewater
14 operations. The Company recognizes that the upgrades ofthe Saw Creek and Blue
15 Mountain treatment plants are somewhat extraordinary events and it is reasonable
16 to extend the amortization period for net salvage from five years to 10 years. The
17 adjustmeni to reflect the 10 year amortization is shown on page 32 R of Exhibit 3-
18 A-Revised.
1 IV. OTS AND OCA ADJUSTMENTS ACCEPTED
2 7. Q. Please identify the adjustments proposed by OTS and OCA that the Company
3 is not contesting.
4 A. The adjustments the Company is not contesting consist ofthe following;
5 Operating Expenses
Inflation Factor - Updated GDP % 1.20% OCA Ex. LA-2, Sch. C-5
Negative Acquisition Adj. $ (8,587) OTS Ex. 3, Sch. 2 Amortization
Rate Case Expense $ (25,495) OTS St. 2, p. 16
6 Capitalization Ratio
7 Capitalization Ratio $ (13,496) OCA Ex. LA-4, Sch. C-l2 8
9 Rate Base
Deferred Taxes - Repairs and Maint. $ (108,235) OCA Ex. LA-2, Sch. B-l
10 Income Taxes
Consolidated Tax Savings $ (30,000) OCA Ex. LA-2, Sch. C-2
Negative State and Federal Income Company will OCA Ex. LA-2, Sch. C-l Tax at Present Rates December 31, reflect
2010
State Tax NOL - Carry Forward 20% reduction OCA Ex LA-2, Sch. A-I
11 Inflation Factor - Mr. Smith proposes that the most recent average quarterly
12 forecasted change in GDP be used to calculate the inflation factor to be applied to
13 HTY expenses upon which the inflation adjustment is based. The Company agrees
14 with Mr. Smith and has applied the 1.20% forecasted GDP in its Exhibit 3-A-
15 Revised.
1 Negative Acquisition Adiustment - OTS witness Kubas has recommended
2 reflecting the net negative amortization ofthe acquisition adjustments, for the
3 Lehman Pike and Blue Mountain wastewater acquisitions, as an increase to annual
4 income. The Company accepts this adjustment.
5 In addition, Mr. Kubas has proposed that the Company remove the original $85,865
6 net negative acquisition adjustment (i.e. excess of depreciated original cost over
7 purchase price) from plant in service, and subtract a corresponding $289,351 from
8 rate base as the amount amortized as of December 31, 2010. The Company
9 disagrees with this adjustment. Counsel advises that Section 1311 (a) ofthe Public
10 Utility Code requires that property purchased at less than depreciated cost be
11 included in rate base at depreciated original cost and that the net effect of Mr.
12 Kubas's proposal would be to flow back to customers the same amount twice.
13 Rate Case Expense - Ms. Wilson recommends a thirty-six (36) month, or three-
14 year, normalization period for the recovery of rate case expense for Northeast in
15 lieu ofthe two-year period utilized by PAW. The Company accepts this
16 adjustment.
17 Deferred Taxes - In response to Interrogatory OCA-28-8, the Company quantified
18 the effect on income taxes ofthe accounting change regarding "repairs and
19 maintenance". Based on that response, Mr. Smith has proposed to reduce rate base
20 by $108,235 to reflect the increase in deferred taxes associated with this accounting
21 change. The Company agrees with the proposed adjustment, which is reflected on
22 page 18R of Exhibit No. 3-A-Revised.
1 Capitalization Ratio - In response to Interrogatory OTS-RE-4, both OCA witness
2 Smith and OTS witness Wilson proposed an adjustment to the Company's claimed
3 capitalization ratio. Mr. Smith proposed a capitalization ratio of 8.96% based upon
4 a three year average and Ms. Smith proposed a capitalization rate of 8.9% based
5 upon a 5 year average. PAW agrees with Mr. Smith that a three year average ofthe
6 capitalization rate is appropriate and accepts his adjustment.
7 Consolidated Tax Savings — In response to Interrogatory OCA-28-74, the
8 Company quantified the effect of so-called Consolidated Tax Savings (CTS)
9 employing the most recent 5-year data. Based on that response, Mr. Smith has
10 proposed a $30,000 allocation ofthe total Company CTS in this wastewater filing.
11 Even though it believes that customers received the full benefit ofthe total
12 Company CTS in PAW's last water rate proceeding, the Company is accepting Mr.
13 Smith's proposed adjustment for purposes of this case.
14 State Net Operating Loss (SNOL) - Mr. Smith has proposed to reduce State
15 taxable income by 20% as a result ofthe Company's 2008 State net operating loss.
16 The Company has reflected this adjustment in the calculation of State income taxes
17 in its Exhibit 3-A-Revised.
18 V. ADJUSTMENTS CONTESTED
19 8. Q. Please identify the adjustments the Company is contesting.
20 A. The adjustments the Company is contesting that I will address consist ofthe
21 following:
9
10
11
Revenues
Availability Charges
Rate Base
Negative Acquisition Adjustment
Operating Expenses
Salary and Wages Purchased Power Expense Eliminated Items Rate Case Expense
OCA
OTS
Discussed Below
OTS Ex. 3, Sch. 2
OTS & OCA OTS & OCA OCA OCA
Discussed below Discussed below Discussed below Discussed below
Capital Structure - Inclusion of short term debt in overall capital structure.
Customer Assistance Program
Customer Assistance Program OCA Discussed below
Property Tax Adiustment
Property Tax Adjustment OCA Discussed below
12
13
14
15
16
In addition to the foregoing items, Mr. Kaufman responds to a proposed excess
capacity adjustment (PAWC St. No. 2-R), Mr. Spanos addresses depreciation
expense (PAWC St. No. 8-R), Mr. Herbert addresses rate design (PAWC St. No. 7-
R) and Mr. Moul addresses rate of retum (PAWC St. No. 9-R).
A. Negative Acquisition Adjustment
17 9. Q. Please address OTS witness Kubas's proposed adjustment to reduce utility
18 plant in service below original cost to reflect his understanding ofthe proper
19 ratemaking treatment of negative acquisition adjustments.
1 A. This approach is flawed because if the acquisition adjustment were both deducted
2 from rate base and amortized to income, the same amount would be flowed-through
3 to customers twice, if the acquisition adjustment were eliminated (by deducting it
4 from rate base), there would be nothing to amortize to income. In addition, and as
5 previously noted, I am advised that Section 1311(a) ofthe Public Utility Code
6 requires that property purchased for less than its depreciated original cost is to be
7 included in rate base at depreciated original cost.
8 B. Availability Charges
9 10. Q. Please address OCA witness Rubin's proposed adjustment for availability
10 fees.
11 A. PAW opposes Mr. Rubin's proposed adjustment for availability charges. In the
12 Company's rate filing at Docket No. R-0072229, the Commission approved the
13 elimination of water availability charges for the Company's water customers whose
14 property is located within the Northeast Wastewater Operations. The elimination of
15 the availability charges was not contested by any of the opposing parties in that
16 case. The loss of availability revenue was recovered from those customers receiving
17 service, as is being proposed in this rate filing. Therefore, the Company believes
18 Mr. Rubin's proposal is inappropriate and should be rejected.
1 C. Salary and Wages
2 11. Q. Please describe OTS witness Wilson's and OCA witness Smith's proposed
3 adjustments to Salary and Wages.
4 A. Ms. Wilson and Mr. Smith have both recommended adjustments to eliminate the
5 January, 1, 2011 salary increase proposed by the Company.
6 12. Q. Do you agree with their proposed adjustments?
7 A. No, I do not. It has been the practice ofthe Commission to grant PAW recovery of
8 wage increases that will occur within six months ofthe end ofthe future test year.
9 Such adjustments have historically included both actual contracted-for increases
10 and estimated increases for non union and union employees whose contracts will
11 expire. The hourly employees of Northeast are non-union, there are no documented
12 performance issues and they will receive an increase on January 1,2011. While
13 the Company concedes it does not know the exact amount ofthe increase, its 3.0%
14 estimate is reasonable and generally consistent with the increases awarded in prior
15 years.
16 Mr. Smith acknowledges that the Commission has previously allowed the
17 annualization of salary and wage increases six months beyond the FTY, but argues
18 for a deviation from Commission practice because PAW's claim purportedly would
19 place an undue burden on customers. However, the total salary increase associated
20 with the January 1, 2011 increase is only approximately $6,900.
1 13. Q. Do Mr. Smith and Ms. Wilson propose any additional adjustments to payroll
2 related expenses based upon their elimination ofthe Company's proposed
3 January 1, 2011 wage increase?
4 A. Yes, Mr. Smith and Ms. Wilson propose derivative adjustments to payroll tax
5 expense, 401 K/defined contribution plan expense and group insurance expense
6 based upon their proposed elimination ofthe Company's January 1, 2011 wage
7 increase. Given that Mr. Smith's and Ms. Wilson's proposed elimination ofthe
8 Company's claimed January I, 2011 wage increase is improper, their derivative
9 adjustments should also be rejected.
10 D. Purchased Power Expense
11 14. Q. Please address OTS witness Wilson's and OCA witness Smith's proposed
12 adjustments to PAW's claim for purchased power expense.
13 A. Ms. Wilson and Mr. Smith both propose an adjustment to purchased power expense
14 based on the Company's response to Interrogatory OTS-RE-9. In short, their
15 adjustments would reduce PAW's claim based on a limited sampling of actual costs
16 incurred to date in 2010. The Company believes that its use of twelve months of
17 historical data is more reliable and should be approved.
10
1 E. Rate Case Expense
2 15. Q. Please address OCA witness Smith's proposed adjustment to reduce rate case
3 expense to a level associated with settlement.
4 A. Mr. Smith has proposed to reduce PAW's rate case expense claim to a level that the
5 Company might expect to incur if this proceeding were settled and did not proceed
6 to full litigation. If the case settles, it will be because the parties were able to agree
7 on a "black box" rate increase amount; if the case does not settle, Mr. Smith's
8 proposed adjustment is not applicable.
9 F. Capital Structure
10 16. Q. OCA witness Woolridge has advocated the inclusion of short term debt (STD)
11 as a part of the Company's permanent capital structure for purposes of
12 determining the Company's overall rate of return. Do you agree?
13 A. Absolutely not. This Commission has routinely eliminated STD from PAW's
14 capital structure, recognizing its purpose for what it is, which is a temporary
15 funding source for infrastructure that is eventually and timely converted to
16 permanent capital in the form of LTD and common equity. The Company has in
17 fact converted its STD balance to permanent capital routinely, as demonstrated by
18 the permanent financings that have taken place over recent years. One needs to
19 look no further then the approximate $1 Million STD balance at 3/31/10 as a
20 portion of an almost $2 billion capital structure for PAW. For these and the other
21 reasons explained by Mr. Moul, Dr. Woolridge's proposals should be rejected.
11
1 G. Phase-In
2 17. Q. What is the Company's position in regards to OTS witness Kubas's phase -in
3 proposal?
4 A. After reviewing all ofthe testimony presented in this proceeding, the Company is
5 willing to phase-in its requested rate increase as follows: (1) rates would be
6 increased to recover an additional $982,000 in annual base rate wastewater revenue
7 at the conclusion of this case (the Effective Date); (2) rates would be increased to
8 recover an additional $904,639 in annual base rate wastewater revenue
9 commencing one year later; (3) rates would be increased by an additional $904,639
10 in annual base rate wastewater revenue, plus carrying charges thereon, commencing
11 two years from the Effective Date to recover the amount not recovered in year one;
12 and (4) rates would be decreased by $904,639 in annual base rate wastewater
13 revenue commencing three years from the Effective Date.
14 H. Customer Assistance Program
15 18. Q. Please address OCA witness Rubin's proposed change to the Company's
16 proposed Customer Assistance Program.
17 A. Mr. Rubin recommends that the discount provided to low income customers be
18 equal to 15% ofthe total wastewater bill. In contrast, the Company proposes a 65%
19 reduction to the monthly service charge portion ofthe bill. The Company believes
20 that its proposal, which generally mirrors the low income customer assistance
21 program previously approved for PAW's water operations, is in the best interests of
22 its customers and should be approved.
12
1 I. Property Tax Adjustment
2 19. Q. Please discuss OCA witness Wilson's elimination of the Company's proposed
3 property tax adjustment.
4 A. In her testimony, Ms. Wilson proposes the elimination ofthe Company's proposed
5 property tax adjustment. Ms. Wilson believes it is more prudent to wait for the
6 actual property tax bills reflecting the assessment ofthe treatment facility upgrades
7 before providing the Company with rate recovery. The Company understands Ms.
8 Wilson's reservations concerning the property tax adjustment. Therefore, the
9 Company proposes it be permitted to implement a STAS that authorizes the
10 Company to reflect in the STAS changes in local property taxes from the levels
11 included in base rates. The STAS employed by electric, gas and water utilities
12 recovers changes in state taxes, including the tax imposed on public utility reality
13 by the Public Utility Realty Tax Act (PURTA). As a wastewater utility, the
14 Northeast Wastewater Operations, unlike other types of utilities, is not subject to
15 Public Utility Realty Tax, but, instead, is subject to local property taxes. The
16 Company believes this proposal would fairly protect both the customer and the
17 Company. If a STAS or similar surcharge mechanism is approved, PAW's revenue
18 requirement would be reduced by approximately $103,799.
19 VI. CONCLUSION
20 20. Q. Does this conclude your rebuttal testimony?
21 A. Yes, it does
13
Exhibit 3-A Revised
R-2010-2166214
August 26, 2010
Pennsylvania American Watar Northeast Wastewatar Operations R-Z010-2166214 Exhibit 3-A Revised
Adj us imam
Rate Base: Deferred Tanas Cash WorKing Capital
Expenses: Rale Case Expense InllalKin Depreeiailon - Nei Salvage Am ori. Negaltve UPAA Amortization Capitaization Ratio - 6.96% Capilajzailon Ratio - a.36"A Capilanzalion Ratio - B.96% Capitalization Ratio - 8.96% Capilalnaiion Ratio - B.96% /(ICO (7)6 TdKSS
Consolidated Tax Savings Slate NOL 20%
Reference
Slml 3-R Slml 3-R
Slml 3-R Slml 3-R Slml 3-R Slml 3-R Slml 3-R Slml 3-R Slml 3-R Slml 3-R Slml 3-R
Slml 3-R Slml 3-R
Description
Reded repairs and mainl. Adjuiiment Blmdiate Rale Case Ainartization from Expense Lag
Three yoar normaiization period Updated GDP Indicator Aaiusl NNS amortizalion period from 5 yea/s lo 10 years Negative UPAA Amorlzallon flowed lo income over 10 yrs
Salary and Wages Group Insurance 40tKandDCP Leased Vehicles Payroll Taxes
Ailocaie Consolidated Tax Savings Reflecl 20% Slate Nel Operating Loss on State Taxable Inc.
Revised page No.
18 R U R
28 R 29 R 32 R 32 A 22 R 23 R 24 R 27 R 33 R
37 R line 31 37 R line 19
Original Adjustment
B87.091 76,494
78,494 1,450
433.533
-2,135 (705)
4,202 (0.395) 1,072
0 0
Revised Adjustmeni
995.316
50,967 1,160
371.002 (8,597) (7,056) (2,495) 3.5B1
(6.559) 255
30.000 218,965
Change
108.235 (76,484)
(25,495) (290)
(67.531) (8,587)
(10,093) 0791)
(621) (174) 017)
30,000 216,965
Concomilanl Changes:
Revenues Penalties Summary of Rale Base Elements CWC Expanses Expense Lag Accrued and Prepaid Taxes CWC imeresi Summary of Operating Expenses uncolleciibles General Assessment Income Taxes Long Term Debt
2 & 3 R SR 10 R 13R 14R 15R 17 R 21 R 31 R 34R 36 R 4 37 R 38 R & 39 R
PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
PRO FORMA STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDING DECEMBER 31. 2009
AND DECEMBER 31. 2010 UNDER PRESENT AND PROPOSED RATES
UNg
NO-
1
2
3
4
S
6
7
8
9
10
11
12
13
U
16
16
17
IB
18
20
21
22
23
24
25
26
27
29
29
oescraFTiON ' '• :';";:: ; : V - V : . ::•'•" •
OPERATING REVENUE
OPERATING REVENUE DEDUCTIONS:
OPERATING EXPENSES
OEPRECWTION
AMORTIZATIONS TAXES. OTHER THAN INCOME;
LOCAL PROPERTY AND MISCELLANEOUS
FEDERAL ENVIRONMENTAL TAX
PUULlC UTIUTY REALTY TAXES
PAYROLL TAXES
GENERAL ASSESSMENT
STATE CAPITAL STOCK TAX
TOTAL TAXES OTHER THAN INCOMt
UTIUTY OPERATING INCOME BEFORE INCOME TAXES
INCOME TAXES:
STATE INCOME TAX FEDERAL INCOME TAX
AMORTISATION OF (TC « EXCESS OEPERRED TAXES
TOTAL INCOME TAXES
TOTAL OPERATING REVENUE DEDUCTIONS
UTIUTY OPERATING INCOME
INCOME OEDUCTIONS;
INTEREST ON LONG TERM DEBT
AMORTIZATION OF DEBT DISCOUNT EXPENSE
INTEREST ON NOTES PAYABLE TO OT HERS
TOTAL INCOME DEDUCTIONS
NET INCOME
PREFERRED DIVTOENDS
NET INCOME TO COMMON
PER BOOKS ' I .
$916,589
753.923
172.033
Q
8.419
0 0
16.778 4.031
0
2S .228
-M.595
-36.487
.110,966
0
-147,455
807.729
108,860
229.124
Q
104
229.226
-120,368
4.434
-3124,802
1 —'—'
• MWUSTWEWT-.K;
-S9.392
-21.667
160.497
0
0
0
0
0
1.504
0
1.504
-149,B26
907
-52.756
0
•51.849
88.585
-97,977
0
0 0
0
-97,977
i-pRESENTJWfES/-
:;:iaii<t|s . .
i-i.vrSMMiUNT . -
S907.137
732.356
332.530
0
8.413
0
Q
16.776
5.535
0
30.732
-188,421
-35.580
-163.724
0
•199.304
896.314
10.883
229.124
0
104
229.228
-218,346
4.43*
-5222,779
" •ACuusrweNT-"
-S33.379
-21.322
210.505
-6.587
103.799
0
0
255
-203
0
103.851
-317.825
-22.S50
-136.212
0
-159.062
125.385
-158.763
94,306
0
-104
94.202
-252.96S
•'.[ • " i z a i n o ; - : '
•;.; A M O U N T - • '•"
5873.819
711.034
543,035
-8.56?
112.216
0
0
17.033 5.332
0
134.583
•506,246
•58.430
-299.936
0
-358,366
1,021,699
-147,880
323,430
0
0
323.430
-471,310
6.230
•S477,S40
ADJUSTMENT ,;
51,866,639
49,349
O
0
0
0
0
0
11.512
0
11.512
1,825,778
145.917
587.954
0
733.871
794.732
1,091,907
-7
0
0
-7
1,091,914
PROPOJSEC RATES:
^.Atftot^n1' : \
S2.760.458
760,383
543,035
-8,587
J 12,2)8
0
0
17.033
16.844
0
146,095
1,319,532
87.487
289.018
0
375.505
1.816.431
944,027
323.423
0
0
323.423
620.604
6.230
5614,374
0m-Np, .'
1
2
3
4
5
6
7
9
9
10
11
12
13
14
15
16
17
IS
13
20
21
22
23
24
25
26
27
28
29
PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
TOTAL INCREASE IN REVENUES BY TARIFF SUBDIVISIONS PROJECTED TO
AN ANNUAL BASIS FOR THE TWELVE MONTHS ENDING DECEMBER 31, 2009
•./UNEi-
".'wo.--:--
1
2
3
4
S
6
7
9
10
11
12
13
U 15
16
17
18
19
20
21 ZZ 23 24
25 26
27
461.1
461.2
451.3
464
466
4&0
460
460
460
460
462,1
462,2 .
470 471 472 474
CUSTOWER CLASS "
OPERATING REVENUES
METERED SALES
RESIDENTIAL
COMMERCIAL
INDUSTRIAL
MUNICIPAL
SALES FOR RESALE
TOTAL METERED SALES
UNMETERED SALES
RESIDENTIAL
COMMERCIAL
INDUSTRIAL
MUNICIPAL
MISCELLANEOUS
TOTAL UNMETERED SALES
PRIVATE PiRg PROTECTION
PUBLIC FIRE PROTECTION
TOTAL WATER SALES
OTHER OPERATING REVENUES
PENALTIES MISC SERVICE REVENUES RENTS FROM PROPERTIES OTHER WATER REVENUES
TOTAL OTHER OPERATING REVENUES
TOTAL OPERATING REVENUES
V ^ ^ P E R : B O O K S ;:':::.•;
(1)
5735,204
69.829
O
0
0
805,033
76,429
0
0
0
0
76,429
O
0
881,462
35,127 O 0 0
35.127
5916,539
'CHANGE Oil
CUSTOMEfiS
(2)'
(3.022)
0
0
0
0
(3,022)
407
0
0
0
0
407
0
0
(2,615)
0 0 0 0
0
(S2,615)
JitMUSTilENTS
(3)
SO
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
$0
• : . . " -OTHER '
; fiEV£NlJ£: ;
ABJUSTMENTS
(4)
$0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(6.7771 0 0 0
(6,777)
(56,777)
-
(5)
£0
O
0
0
0
0
0
0
0
0
0
0
0
0
0
0 0 0 0
0
so
(6)
so 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0 0 0 0
0
so
(7)
so 0
0
0
0
fi
0
0
0
0
0
0
0
0
0
0 0 0 0
0
$0 : 1 1 1
(8)
so 0
0
0
0
0
0
0
0
0
0
0
0
0 0 0 0
0
so
: , ^ ;p f iOEQRMA •'•. :RRJBs^*rR*ifEa:
(3)
S732.162
69.829
0
0
0
802,011
76.836
0
0
0
0
76,836
0
0
878,847
28,350 0 0 0
28.350
i 5907,197
" • ' | PAGE 1 OF 2
PAGE 2 PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
TOTAL INCREASE IN REVENUES 8Y TARIFF SUBDIVISIONS PROJECTED TD
AN ANNUAL BASIS FOR THE TWELVE MONTHS ENDING DECEMBER 31,2010
-•'•ijiuB -
i
2
3 4 5 6 7
9
10
11 12 13 14 15
16
17
18
19
20
21 22 23 24
25
26
27
ACCT. :wo;: • :
461,1 461,2 4613 464 466
460 460 460
460 460
462.1
462.2
470 471 472 474
Cl istOMERCLASSiFICATiOtl ;:::.
OPERATING REVENUES
METERED SALES
RESIDENTIAL COMMERCIAL INDUSTRIAL MUNICIPAL
SALES FOR RESALE
TOTAL METERED SALES
UNMETERED SALES
RESIDENTIAL COMMERCIAL INDUSTRIAL MUNICIPAL MISCELLANEOUS
TOTAL UNMETERED SALES
PRIVATE FIRE PROTECTION
PUBUC FiRE PROTECTION
TOTAL WASTEWATERSALES
OTHER OPEFiATING REVENUES
PENALTIES
MISC SERVICE REVENUES RENTS FROM PROPERTIES OTHER REVENUES
TOTAL OTHER OPERATING REVENUE
TOTAL OPERATING REVENUES
•H:- -PROFORMA • : : i : | ; pReseMTRATES •:•
"'- 52/310010 ..
(IJ
S732 162 69.829
0
0 0
802,011
75,936 0 0 0 0
76.836
0
0
878,847
28,350 0 0 0
28,350
$907,197
CUSTOMER;; CHANGES •
(2)
513.512 0 0 0 0
13,512
776 0 0 0 0
776
0
0
14,288
0 0 0 0
0
$14,288
.ELIMSMTC :
AVAlLA&UTY
(3)
SO
0
0
o 0
0
(46.623) 0 0 0 0
(46.623)
0
0
(46.623)
0 0 0 0
0
($46,623)
:OT«ER OPERATING
i'-MWSHUBS. ..
SO
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(1 ,043)
0
0
0
(1,043)
(1,043)
R E C L A S S I F Y .
R E V E N U E .
(5)
$27 ,367
0
0
0
0
27 ,367
(27.367)
0
0
0
0
(27 ,367)
0
0
0
0
0
0
0
0
so
PROFORWA; .
PRESENT RATES .*M3i/»1D:- :
(6)
S773.C61
69.829 0 0 0
&42,890
3.622 0 0 0 0
3,622
0
0
846,512
27.307 0 0 0
27,307
$873,819
• • . • '
::p£ftCEWr.
(7)
207.77%
306.37% 0.00% 0-00% 0,00%
216.94%
209.06% 0.00% 0.00% 0.00% 0.00%
0.00%
0.00%
0.00%
215.91%
215.90% 0.00% 0.00% 0.00%
215.90%
215.91%
'•'.'.AtmiiiT.-i^
<S)
1.606.176 213.934
0 0 0
1.820,110
7,572 0 0 0 0
7,572
O
0
1,827.682
58,957 0 0 0
58,957
S1,886,639
I
;; .PROFORlflA
rPROPOSSD RATES
(9)
S2.379.237 283.753
0 0 0
2.563,000
11.134 0 0 0 0
11,194
0
0
2,674,194
85.254 0 0 0
86,264
$2,760,458
PAGE 2 OF 2
5R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
OPERATING REVENUES
PENALTIES
The following adjustment reflects the annualization of penalty revenues associated with billed sales projected during 2010- Additionally, annualized late payment charges are calculated based on revenues at the proposed rate level.
LINE NO.
1
2 3
4
5
6
7
DESCRIPTION
TOTAL BILLED SALES
% OF PENALTIES TO TOTAL SALES (3 YEAR AVERAGE)
PENALTIES
LESS: PER BOOKS AT 12-31-09
PER BOOKS 12/31/09
$881,462
35,127
LESS: PRESENT RATES AT 12-31-10
PRO FORMA ADJUSTMENTS
PRESENT RATES 12/31/10
5846,512
3,2258000%
27.307
35,127
($7,820)
PROPOSED RATES
$2,674,194
3.2258000%
86.264
27.307
$58,957
WITNESS; JOANNeLONTZ
10 R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO RATE BASE ELEMENTS^
SUMMARY OF RATE BASE ADJUSTMENTS
LINE
NO. DESCRIPTION
DEPRECIATED DEPRECIATED DEPRECIATED
ORIGINAL COST ORIGINAL COST ORIGINAL COST
12/31/09 12/31/10 PROPOSED
1 NON-DEPRECIABLE PLANT
2 DEPRECIABLE PLANT
3 TOTAL UTILITY PLANT IN SERVICE
4 DEDUCT: 5 CONTRIBUTIONS IN AID OF CONSTRUCTION 6 CUSTOMER ADVANCES FOR CONSTRUCTION
7 SUB-TOTAL
8 NET UTILITY PLANT IN SERVICE
9 ACCRUED DEPRECIATION
10 DEPRECIATED UTILITY PLANT IN SERVICE
11 ADD: 12 MATERIALS AND SUPPLIES 13 CASH WORKING CAPITAL - EXPENSES 14 ACCRUED AND PREPAID TAXES
11,591,467
11,591.475
2.176,836 20,000
2,196,836
9,394.639
1,101,161
8,293.478
4,190 59,783
6.704
13,806,761
13,806.769
2,176,836 20,000
2.196,836
11,609.933
17,325
11,592.608
4,190 54.650 49,490
13,806,761
13,806.769
2.176.836 20,000
2,196,836
11,609.933
17.325
11.592,608
4,190 54.650 49,260
15 DEDUCT. 16 CASH WORKING CAPITAL - INT AND DIV 25,563 36,066 36.066
17 DEFERRED TAXES
18 TOTAL RATE BASE ELEMENTS
950,487 995,316 995.316
$7.388,105 $10,669,556 $10,669,326
19 UTILITY OPERATING INCOME
20 PER BOOKS 21 PRESENT RATES AT 12-31-09 22 PRESENT RATES AT 12-31-10 23 PROPOSED RATES
$108,860 $10,883
$147,880 $944,027
1.47% 0.15%
--
1.02% -
-1.39% -
1.02%
8.85%
13R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO RATE BASE ELEMENTS
CALCULATION OF CASH WORKING CAPITAL REQUIREMENTS
Charges for water and wastewater services are billed in arrears on a monthly basis, The calculation set forth below reflects summarized operating revenues billed for the twelve months ended December 31, 2009, and as annualized under present rates for the twelve months ending December 31, 2009 and 2010. The calculation further reflects the average fag in receipt of revenues (ess the lag in payment of operating expenses to determine cash working capital requirements.
LINE NO. DESCRIPTION
PER BOOK AMOUNT
PRESENT RATES PRESENT RATES 12/31/09 12/31/10
AMOUNT AMOUNT
OPERATING REVENUE BILLED DURING THE TWELVE MONTHS ENDED 12/31/09
2 BI-MONTHLY BILLINGS 3 LAG DAYS 4 DOLLAR DAYS
5 QUARTERLY 6 LAG DAYS 7 DOLLAR DAYS
8 MONTHLY BILLINGS 9 LAG DAYS 10 DOLLAR DAYS
681.482 50.5
878.847 50.5
44.513,831 44.381.774
846.512 50.5
42.748,856
11 12
13 14 15 18 17
18 19
20 21
22
23
24
25
TOTAL BILLED REVENUE TOTAL DOLLAR DAYS
AVERAGE LAG IN RECEIPT OF REVENUE (UNE 12/LINE11) DEDUCT: AVERAGE LAG IN PAYMENT OF OPERATING EXPENSES
$881,462 $44,513,831
50.5
19,7
AVERAGE LAG BETWEEN PAYMENT OF OPERATING EXPENSES AND RECEIPT OF REVENUES 30.8
WORKING CAPITAL REQUIREMENTS ANNUAL OPERATING EXPENSES
OPERATING EXPENSES PER DAY
(UNE 18/365 DAYS)
CASH WORKING CAPITAL REQUIRED
(UNE 16'LINE 20)
$878,847 $44,381,774
50.5
19.7
30.8
$708,626
1,941
$846,512 $42,748,856
50.5
19.2
31.3
$637,190
1,748
$59,783 S54.650
WITNESS: JOHN COX
14R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO RATE BASE ELEMENTS
SUPPORT OF EXPENSE DAYS
LINE NO.
1 2 1
S
7
a
DESCRIPTION
CHEMICALS
GROUP INSURANCE LABOR AND LABOR RELATED LEASED ECUIPMENT TRANSPORTATICN MISCELLANEOUS PURCHASED POWER WASTE DISPOSAL
LAO DAV! i
30 0 ( I H ) 1*5 ! , 0
29.1 2S.3 36 5 28.1
PER BOOKS
AMOUNT
KM .175 30.810
227,572 0
26.201 80.665
118.771 194,232
DOLLAR DAYS
W 4 U 5 0 (533,454)
2.644,850 0
762,449 2,040,625 1,147,432 5.069.455
PRESENT RATES 11-31-0* DOLLAR
AMOUNT DAYS
S21.375 $841,280 39.910 [533.454)
227,573 2.844.650 0 0
26.101 762.449 80.665 2.040.825
118.771 3,147,432 194,232 5,069.455
PRESENT RATCS 12-31-10
AMOUNT
$34,144 37.314
223,195 0
19,64! 61,625
113,904 137,268
DOLLAR DAYS
$724,320 (500,009)
2,799.936 0
&M.5S2 2,070.171 3,015,906 3.582,643
9 TOTALS
'0 AVCRACE LAG
WITNESS JOHN COX
^06,626 ' ^ f f i . S O ^ . , . 7 |0a^6 13^72,607 Jf&iaO .. . . .J j .2MjS* r
)9.7 19 7 ffl?
15R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO RATE BASE ELEMENTS
ACCRUED AND PREPAID TAXES
UNE
NO.
1
2
3
4
S
DESCRIPTION
GENERAL ASSESSMENT
PROPERTY TAX
STATE INCOME TAX
FEDERAL INCOME TAX
TOTALS
NET LEADf
LAG DAYS
FUTURE
125
145.0
21.8
-8.0
PRESENT RATES 12-J1-09
TAXES
PAYABLE
$5,535
8,419
-35.580
-183.724 _
ACCRUED
TAXES
ADJ
$1,896
3,345
-2.125
3,588
S6.704
PRESENT RATES 12-31-10
TAXES
PAYABLE
$5,332
112.218
-58,430
-299,936 _
ACCRUED
TAXES
ADJ
$1,826
44,580
-3,490
8,574
$49,490'
PROPOSED RATES
TAXES
PAYABLE
$16,844
112.218
87,487
288.018 _
ACCRUED
TAXES
ADJ
$5,768
44,580
5.225
-6,313
$49,260
WITNESS: JOHN COX
17R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO RATE BASE ELEMENTS
CALCULATION OF CASH WORKING CAPITAL REQUIREMENTS INTEREST AND PREFERRED DIVIDENDS
The payment of interest on the Company's long term debt is made six months in arrears. Payment of interest on the Company's short term debt is made monthly in arrears. The payment of dividends on the Company's preferred stock is made quarterly. The average lag days of interest and dividend payments and the deduction of the average lag days for the receipt of revenue is calculated below to determine capital requirements,
LINE NO. DESCRIPTION
1 AVERAGE LAG CALCULATION
2 FUTURE REVENUE LAG DAYS 3 LESS: INTEREST PAYMENTS LAG DAYS
A AVERAGE LAG BETWEEN THE PAYMENT 5 OF INTEREST ANO THE RECEfPT 6 OF REVENUES
LONG TERM INTEREST
50.5 91,3
SHORT TERM INTEREST
50,5 15.2
PREFERRED DIVIDEND
50.5 45.6
-40.8 35.3 4.9
7 LONG TERM DEBT
8 WORKING CAPITAL REQUIREMENTS 9 PRO FORMAANNUAL INTEREST EXPENSE
10 INTEREST EXPENSE PER DAY 11 (LINE 9 / 3 6 5 DAYS)
12 CASH WORKING CAPITAL REQUIRED
13 (LINE6COL.1 x LINE 10)
14 SHORT TERM DEBT
15 WORKING CAPITAL REQUIREMENTS 16 PRO FORMA ANNUAL INTEREST EXPENSE
PRESENT RATES 12*31/09
S229.124
62 B
PRESENT RATES 12/31/10
(25.622)
S323.430
PROPOSED AMOUNT
5323,423
(36,149) (38.149)
104
17 INTEREST EXPENSE PER DAY 10 (LINE 16 /366 DAYS)
19 CASH WORKING CAPITAL REQUIRED
20 (L INE6COL.2xL INE17)
21 PREFERRED DIVIDENDS
22 WORKING CAPITAL REQUIREMENTS 23 PRO FORMA ANNUAL DIVIDEND EXPENSE
24 DIVIDEND EXPENSE PER DAY
25 (LINE 23 /365 DAYS)
26 CASH WORKING CAPITAL REQUIRED 27 {UNE6COL.3xL lNE2 '1 )
28 TOTAL CASH WORKING CAPITAL REQUIRED 29 (LINE 13 t LINE 20 • LINE 27)
4,434
12
59
($26.563)
6.230
17
33
(136.066)
6,230
17
03
(t36,0661
WITNESS: JOHN COX
18 R PENNSYLVANIA AMERICAN WATER- NORTHEAST WW OPERATIONS
NOTES TO RATE BASE ELEMENTS
CALCULATION OF DEFERRED INCOME TAXES
The following calculation is being made to reflect the tax difference between using accelerated and straight-fine depreciation, and is carried as a rate base reduction.
DEFERRED LINE VINTAGE TAX BASE ACCELERATED STRAIGHT-LINE EXCESS FEDERAL
NO. YEARS PROPERTY TAX DEPRECIATION REMAINING LIFE DEPRECIATION TAXES
1 04/02-12/10 $10,708,614 $290,318 $471,478 -$181,160 -$63,406
2 PLUS: REPAIRS & MAINTENACE ADJUSMTENT 108.235
3 44,829'
4 BALANCE OF DEFERRED INCOME TAXES AT 12-31-09 (950.487)
5 BALANCE OF DEFERRED INCOME TAXES AT 12-31-10 ($995.3161 WITNESS: JOHN COX REFERENCE: FR IV.4
21 R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
OPERATING EXPENSES
SUMMARY OF OPERATING EXPENSE ADJUSTMENTS
LINE
NO. DESCRIPTION
12/31/09
DETAIL
PRESENT RATES
12^31/09
AMOUNT
12/31/10
DETAIL
PRESENT RATES
12/31/10
AMOUNT
1 PER BOOKS $753,923
2 PRESENT RATES AT 12-31-09
3 SALARIES AND WAGES 4 GROUP INSURANCE 5 401K & DEFINED CONTRIBUTION PLAN 6 CHEMICALS 7 PURCHASED POWER 8 LEASED VEHICLES 9 RATE CASE EXPENSE
10 INFLATION 11 WASTE DISPOSAL
$732,356
(7.95S) (2.496) 3.561 2,769
(4,967) (6.559) 50,987
1,160 (56,966)
12 UNCOLLECTABLES ffLSSTJ -S73
13 PRO FORMA ADJUSTMENTS
14 PRESENT RATES 12-31-09
15 PRESENT RATES 12-31-10
(21.567)
$732,356
-21.322
$711,034
22 R PENNSYLVANIA AMERICAN WATER- NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
OPERATING EXPENSES
SALARY AND WAGES
The following adjustment sets forth a summary of the Company's annualization of labor expenses. The pro forma payroll for the future annualization was developed by applying pay rates that will become effective during the six month period immediately following the end of the future test year, as approved at Docket No. R-943231, to the Company's full complement of employees.
PRESENT RATES LINE 12/31/2010 NO. DESCRIPTION AMOUNT
1 ANNUALIZED SALARY AND WAGES $230,945
2 LESS: 8.96% NOT CHARGED TO OPERATING EXPENSE 20,693
3 SUB-TOTAL 210.252
4 LESS: AMOUNT CHARGED TO OPERATING EXPENSE 5 DURING THE TWELVE MONTHS ENDED 12-31-09 218.210
6 PRO FORMA ADJUSTMENT -S7.958
601.1 SALARY AND WAGES - SOURCE OF SUPPLY $0 601.2 SALARY AND WAGES - SOURCE OF SUPPLY O 601.3 SALARY AND WAGES - WATER TREATMENT -5.685 601.4 SALARY AND WAGES - WATER TREATMENT -6 601.5 SALARY AND WAGES - TRANSMISSION & DISTRIBUTION 0 601.6 SALARY AND WAGES - TRANSMISSION & DISTRIBUTION -231 601.7 SALARY AND WAGES - CUSTOMER ACCOUNTING 0 601.8 SALARY AND WAGES - ADMINISTRATIVE AND GENERAL -2.036 603.8 SALARY AND WAGES - SALARY OF OFFICERS 0
REFERENCE: EXHIBIT NO. 3-B WITNESS: DANIEL P. HUNNELL I)
23 R PENNSYLVANIA AMERICAN WATER- NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
OPERATING EXPENSES
GROUP INSURANCE
The annualization of the group insurance cost was based on the January 2010 premiums annualized for the future test year number of employees less the annualized employee contribution. The following calculation reflects the annualization less the adjustment for that portion not charged to operations.
LINE NO. DESCRIPTION
PRESENT RATES 12/31/2010 AMOUNT
1 ANNUALIZED GROUP INSURANCE COST
2 LESS: 8.96% NOT CHARGED TO OPERATING EXPENSE
3 SUB-TOTAL
540.986
3,672
37.314
4 LESS; AMOUNT CHARGED TO OPERATING EXPENSE 5 DURING THE TWELVE MONTHS ENDED 12-31-09
6 PRO FORMA ADJUSTMENT
39.810
($2,496)
604,8 A&G EMPLOYEES PENSION AND BENEFITS
REFERENCE: EXHIBIT NO. 3-B WITNESS: DANIEL P. HUNNELL II
($2,496)
24 R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
OPERATING EXPENSES
401K & DEFINED CONTRIBUTION PLAN COST (DCP)
The following adjustment is being made to annualize the cost associated with the Company's contribution for 401 k and DCP associated with the full complement of employees at December 31,2010.
LINE NO. DESCRIPTION
PRESENT RATES 12/31/2010 AMOUNT
ANNUALIZED 401 K & DCP COST
LESS: 8.96% NOT CHARGED TO OPERATING EXPENSE
SUBTOTAL
LESS: AMOUNT CHARGED TO OPERATING EXPENSE DURING THE TWELVE MONTHS ENDED 12-31-09
PRO FORMA ADJUSTMENT
$14,217
1,274
12,943
9,362
$3,581
604.8 A&G EMPLOYEES PENSION AND BENEFITS $3,581
REFERENCE: EXHIBIT NO. 3-B WITNESS: DANIEL P. HUNNELL 11
27 R PENNSYLVANIA AMERICAN WATER- NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
OPERATING EXPENSES
LEASED VEHICLES
Starting in 2010 the Company will begin purchasing vehicles utilized in its operations. The following adjustment reflects the elimination of lease expense for those vehicles to be replaced during 2010. In addition, the December 2009 monthly lease costs were annualized for the number of leased vehicles that remain in service at December 31.2010.
LINE Jio. DESCRIPTION
PRESENT RATES 12/31/2010 AMOONT
1 ANNUALIZED LEASED VEHICLES COST
2 LESS: 8.96% NOT CHARGED TO OPERATING EXPENSE
3 SUB-TOTAL
4 LESS: AMOUNT CHARGED TO OPERATING EXPENSE 5 DURING THE TWELVE MONTHS ENDED 12-31 -09
$3,972
356
3.616
10,175
PRO FORMA ADJUSTMENT
650.8 A & G - MISCELLANEOUS GENERAL EXPENSE
REFERENCE: EXHIBIT 3B WITNESS: JOHN R. COX
($6,559)
($6,559)
28 R PENNSYLVANIA AMERICAN WATER- NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
OPERATING EXPENSES
RATE CASE EXPENSE
The following adjustment reflects the estimated cost of this rate case at December 31, 2010.
LINE NO. DESCRIPTION
PRESENT RATES 12/31/2010 AMOUNT
LEGAL FEES AND EXPENSES RATE OF RETURN COST OF SERVICE AND RATE DESIGN DEPRECIATION MISCELLANEOUS
TOTAL
NORMALIZED OVER 3 YEARS
LESS; AMOUNT CHARGED TO OPERATING EXPENSE DURING THE TWELVE MONTHS ENDED 12-31-09
$120,000 7,000 6,449 6,750
12,769
152,968
50,967
PRO FORMA ADJUSTMENT $50,987
666.8 REGULATORY COMMISSION EXPENSE
REFERENCE: EXHIBIT 3B WITNESS; JOHN COX
$50,987
29 R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
OPERATING EXPENSES
INFLATION
The Company has presented various pro forma adjustments for specific expense items, The remaining expense items are anticipated to continue to rise due to inflationary increases. The following adjustment reflects projection of increases due to inflation.
PRESENT RATES LINE 12/31/2010 NO. DESCRIPTION AMOUNT
1 TOTALO&M EXPENSES $753,923
2 LESS: ADJUSTMENTS . 657,232
3 EXPENSES SUBJECT TO INFLATION 96,691
4 INFLATION FACTOR ._ 1.20%
5 PRO FORMA ADJUSTMENT $1,160
675,3 MISCELLANEOUS EXPENSE $1,160
REFERENCE: EXHIBIT 3B WITNESS; JOHN COX
31 R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
OPERATING EXPENSES
CALCULATION OF UNCOLLECTABLE ACCOUNTS EXPENSE
The following adjustment reflects the uncollectable accounts expense calculated on the ratio of actual per books revenue to net write-offs. This ratio is applied to pro forma water sales at present and proposed rates.
LINE NO DESCRIPTION
PRESENT RATES PRESENT RATES PROPOSED 12/31/09 12/31/10 RATES
PER BOOKS AMOUNT AMOUNT AMOUNT
1 WASTEWATER SALES $881,462 $878,847 $846,512 $2,674,194
2 3 YEAR AVERAGE 0.027001091 0.027001091 0.027001091 0.027001091
3 ANNUALIZED UNCOLLECTABLE EXPENSE $23,730 $22,857 $72,206
4 LESS: AMOUNT CHARGED TO OPERATING EXPENSE
DURING THE TWELVE MONTHS ENDED 12-31-09 45,297
5 LESS: PRESENT RATES AT 12-31-09 23.730
6 LESS: PRESENT RATES AT 12-31-10 22.857
7 PRO FORMA ADJUSTMENT (21,567) -$873 $49,349
670.7 CUSTOMER ACCOUNTING AND COLLECTING BAD DEBT
WITNESS; JOHN COX REFERENCE: EXHIBIT 3-B
(21,567) -$873 $49,349
32 R PENNSYLVANIA AMERICAN WATER- NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
ANNUAL DEPRECIATION CALCULATED BY STRAIGHT
LINE-REMAINING LIFE OVER BOOK ANNUAL DEPRECIATION
LINE NO. DESCRIPTION
PRESENT RATES 12/31/2010 AMOUNT
ANNUALIZED DEPRECIATION LESS; AMORTIZATION OF NET SALVAGE ADJUSTMENT TO 10 YEARS
NET SALVAGE LEHMAN PIKE WWTP 417.440 BLUE MOUNTAIN WWTP 257,870 TOTAL NET SALVAGE 675.310
5 YEAR AMORTIZATION 135,062 10 YEAR AMORTIZATION 67,531 ADJUSTMENT (67,531)
$610,566 (67,531)
543,035
2 PER BOOKS AT 12/31/09
3 PRO FORMA ADJUSTMENT
403 DEPRECIATION
172,033
$371,002
$371,002
32 A PENNSYLVANIA AMERICAN WATER
NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
ACQUISITION ADJUSTMENT
The following adjustment is being made to reflect a ten year amortization of the negative utility plant acquisition adjustment.
LINE NO. DESCRIPTION
PRESENT RATES 12/31/2010 AMOUNT
1 ACQUISITION ADJUSTMENT (NET OF LEHMAN PIKE AND BLUE MOUNTAIN)
2 PERIOD-10 YEARS
3 ANNUAL AMORTIZATION
4 LESS; PER BOOKS
5 ADJUSTMENT
(85,865)
10
(8,587)
0
(8.587)
WITNESS: ROD NEVIRAUSKAS
33 R PENNSYLVANIA AMERICAN WATER- NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
TAXES OTHER THAN INCOME
PAYROLL TAXES
The following adjustment is being made lo annualize payroll tax expense based on the annualized salary and wage claim at December 31, 2010.
LINE NO. DESCRIPTION
PRESENT RATES 12/31/2010 AMOUNT
1 ANNUALIZED PAYROLL TAXES
2 LESS: 8.96% NOT CHARGED TO OPERATING EXPENSE
3 SUB-TOTAL
$18,709
$1,576
$17,033
4 LESS: AMOUNT CHARGED TO OPERATING EXPENSE 5 DURING THE TWELVE MONTHS ENDED 12-31-09
6 PRO FORMA ADJUSTMENT
$16,778
$255
408.12-TAXES-PAYROLL
REFERENCE: EXHIBIT NO. 3-B WITNESS; DANIEL P. HUNNELL II
$255
34 R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
CALCULATION OF GENERAL ASSESSMENT BY THE PENNSYLVANIA PUBLIC UTILITY COMMISSION, CONSUMER ADVOCATE AND SMALL BUSINESS ADVOCATE FEES
LINE NO. DESCRIPTION
PRESENT RATES PRESENT RATES 12/31/09 12/31/10 PROPOSED
AMOUNT AMOUNT AMOUNT
TOTAL WASTEWATER SALES $878,847 $846,512 $2.674,194
2 ESTIMATED GENERAL ASSESSMENT BY THE PENNSYLVANIA 3 PUBLIC UTILITY COMMISSION AT .004777980298 4 PER DOLLAR OF TOTAL WASTEWATER SALES SUBJECT TO TA)
5 CONSUMER ADVOCATE FEE AT .001388377500 6 PER DOLLAR OF TOTAL WASTEWATER SALES 7 SMALL BUSINESS ADVOCATE FEE AT .000132518596 8 PER DOLLAR OF TOTAL WASTEWATER SALES
9 LESS: AMOUNT CHARGED TO OPERATING EXPENSES DURING
10 THE TWELVE MONTHS ENDED 12-31-09
11 LESS: PRO FORMA UNDER PRESENT RATES AT 12-31-09
12 LESS; PRO FORMA UNDER PRESENT RATES AT 12-31-10
4.199 4,045
5.535
12.777
1,220
116
5.535
4,031
1,173
112
5,332
V
3,713
354
16.844
,
5.332
13 PRO FORMA ADJUSTMENT $1,504 -$203 $11,512
507.1 TAXES OTHER THAN INCOME
WITNESS: JOHN COX
$12,613
36 R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
PRO FORMA STATE AND FEDERAL INCOME TAXES UNDER PRESENT AND PROPOSED RATES
LINE NO. DESCRIPTION
PRESENT RATES PRESENT RATES 12/31/09 12/31/10 PROPOSED AMOUNT AMOUNT AMOUNT
1 STATE INCOME TAX PER COMPUTATION
2 SHOWN ON FOLLOWING PAGE
3 LESS: STATE INCOME TAX PER BOOK 4 COMPUTATION SHOWN ON FOLLOWING PAGE
5 LESS: PRESENT RATES 12-31-09
6 LESS; PRESENT RATES 12-31-10
-$35,580
-36.487
•$58,430
-35,580
$87,487
-58,430
PRO FORMA ADJUSTMENT $907 ($22,850) $145,917
FEDERAL INCOME TAX PER COMPUTATION
SHOWN ON FOLLOWING PAGE -$163,724 •$299,936 $288,018
10 LESS: FEDERAL INCOME TAX PER BOOK
11 COMPUTATION SHOWN ON FOLLOWING PAGE
12 LESS: PRESENT RATES 12-31-09
13 LESS: PRESENT RATES 12-31-10
-110,968
-163.724
-299.936
14 PRO FORMA ADJUSTMENT ($52.756) (S136.212) $587,954
WITNESS: ROD NEVIRAUSKAS
PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
CALCULATION OF STATE AND FEDERAL INCOME TAXES
37 R
LINE
NO. DESCRIPTION PER BOOKS
PRESENT RATES PRESENT RATES
12/31/09 12/31/10 PROPOSED
AMOUNT AMOUNT AMOUNT
1 UTILITY OPERATING INCOME BEFORE TAXES
2 LESS: INTEREST EXPENSE
3 TAXABLE OPERATING INCOME
4 ADD:
5 PREMATURE PROPERTY LOSSES 6 DEPR - STRAIGHT LINE-REMAINING LIFE
7 TAXABLE MEALS & ENTERTAINMENT
S
9 TOTAL
10 DEDUCT: 11 TAX DEPRECIATION:
12 ADR ON PRE 1981 ASSETS
13 ACRS ON POST 1980 ASSETS
14 MACRS ON POST 19eeASSETS
15 COST OF REMOVAL
16 TOTAL
17 TAXABLE INCOME
18 STATE NOL
19 TAXABLE INCOME AFTER STATE NOL
20 STATE INCOME TAX AT: 21 HISTORIC • 9.99%, FUTURE - 9.99%
22 TAXABLE INCOME AFTER STATE INCOME TAX
23 ADD: 24 COST OF REMOVAL NON ADR PROPERTY 25 ACRS ON POST 1980 ASSETS 26 MACRS ON POST 1986 ASSETS
STATE NOL 27 DEDUCT' 28 SLRL ON POST ISBOASSETS
29 INCOME SUBJECT TO FEDERAL INCOME TAX [IF NEGATIVE USE 0)
30 FEDERAL INCOME TAX AT 35%
31 CONSOLIDATED TAX SAVINGS ADJUSTMENT
32 FEDERAL TAX LIABILITY
WITNESS: ROD NEVIRAUSKAS
•336.595
229.228
-267,323
0 172,033
172.033
•328,744
0 0
333.894 -64.453
-J18Q.421
229.228
-417,649
0
332,530
332.530
-320,581
0 0
333,894 -S2.852
-$506,246
323,430
-Q29.676
0
543,035
543,035
-526,450
71,557 0
372,902 •146.220
$1,319,532
323,<123
996.109
0
543,035
543,035
0 0
333.894
0
333,894
-429.684 -64,453
-365,231
-36,467
0 0
333,094
0
333,894
-419,013 -62,852
-356,161
-35,580
0 0
372,902
71.557
444,459
-731,100 -146.220 -S84.880
-66,430
0 0
372.902
71,557
444.459
1,094,586 218.937 875,748
87,487
788.281
71,55? 0
372.902 216.93?
172,033
-231,336
-SSO. 986
330,000
-1110.968
332.530
-382,069
-$133,724
530,000
$183,724
543,035
•771.246
-5269.936
130,000
-$299,936
543.035
908,622
$318,018
$30,000
$288,018
PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
PRO FORMA INTEREST UNDER PRESENT AND PROPOSED RATES
38 R
LINE
NO. DESCRIPTION
PRESENT RATES PRESENT RATES
12/31/09 12/31/10 PROPOSED
AMOUNT AMOUNT AMOUNT
1 INTEREST ON LONG TERM DEBT PER COMPUTATION 2 SHOWN ON FOLLOWING PAGE
3 LESS: INTEREST ON LONG TERM DEBT AS PER BOOK
4 COMPUTATION ON FOLLOWING PAGE
5 LESS; PRESENT RATES AT 12-31-09
6 LESS: PRESENT RATES AT 12-31-10
$229,124
229,124
$323,430 $323,423
229,124
323,430
7 PRO FORMA ADJUSTMENT $0 $94,306 ($7)
8 INTEREST ON SHORT TERM DEBT PER COMPUTATION 9 SHOWN ON FOLLOWING PAGE
10 LESS: INTEREST ON SHORT TERM DEBT AS PER BOOK
11 COMPUTATION ON FOLLOWING PAGE
12 LESS; PRESENT RATES AT 12-31-09
13 LESS: PRESENT RATES AT 12-31-10
$104
104
$0
104
$0
14 PRO FORMA ADJUSTMENT $0 _($104) $0
WITNESS: ROD NEVIRAUSKAS
39 R PENNSYLVANIA AMERICAN WATER - NORTHEAST WW OPERATIONS
NOTES TO STATEMENT OF INCOME
APPLICATION OF INCOME DEDUCTIONS
LINE
NO. DESCRIPTION
1 CAPITAL STRUCTURE
2 LONG TERM DEBT 3 SHORT TERM DEBT
4 TOTAL DEBT 5 PREFERRED STOCK 6 COMMON EQUITY
7 TOTALS
PRESENT RATES AT DECEMBER 31, 2009 PRESENT RATES AT DECEMBER 31, 2010
AMOUNT CAPITAL
STRUCTURE COST RATE AMOUNT CAPITAL
STRUCTURE COST RATE
$951,447,759 7,496.277
958.944,036 14.171,700
944,413,846
$1,917,529,582
49,62% 0.39%
30,01% 0,74%
49.25%
100.0%
6.25% 0.36%
8.11%
$966,055,512 0
966.055,512 14,171,700
982.987,846
$1,953,215,058
49.21% 0.0%
49.21% 0.72%
50.07%
100.0%
6.16% 0.00%
8.11%
8 APPLICATION OF LONG TERM DEBT INTEREST:
9 ORIGINAL COST RATE BASE
10 DEBT PERCENTAGE (FROM ABOVE)
11 DEBT PORTION OF RATE BASE
12 INTEREST COST (FROM ABOVE)
13 PRO FORMA LONG TERM INTEREST DEDUCTION
PRESENT RATES 12-31-09
AMOUNT
$7,388,105
49.62%
PRESENT RATES
12/31/2010 AMOUNT
$10,669,556
49.21%
PROPOSED AMOUNT
$10,669,326
49.21%
3.665,978
6.25%
5,250,489
6.16%
$229,124 $323,430
5,250.375
6.16%
$323,423
14 APPLICATION OF SHORT TERM DEBT INTEREST;
15 ORIGINAL COST RATE BASE
16 DEBT PERCENTAGE (FROM ABOVE)
17 DEBT PORTION OF RATE BASE
18 INTEREST COST (FROM ABOVE)
19 PRO FORMA SHORT TERM INTEREST DEDUCTION
$7,388,105 $10,669,556 $10,669,326
0.39% 0.00% • 0.00%
28.814
0.36%
$104
0
0.00%
$0
0
0.00%
$0
WITNESS: ROD NEVIRAUSKAS
PAWC STATEMENT NO. 7-R
BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION
REBUTTAL TESTIMONY OF PAUL R. HERBERT
ON BEHALF OF PENNSYLVANIA-AMERICAN WATER COMPANY
DOCKET NO. R-2010-2166214
CONCERNING
NORTHEAST WASTEWATER OPERATIONS COST OF SERVICE ALLOCATION
AND
CUSTOMER RATE DESIGN
AUGUST 26, 2010
v^fy
AUG 2 6 2010
PA PUBLIC UTILITY COMMISSION SECRETARY'S 8UReAU
BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION
RE: PENNSYLVANIA-AMERICAN WATER COMPANY DOCKET R-2010-2166214
REBUTTAL TESTIMONY OF PAUL R. HERBERT
Line
No. 1
2
3
4
5
6
7
8
9
10
II
12
13
14
15
16
17
18
19
Q.
A.
Q.
A.
Q.
A.
Q.
A.
Q.
A.
Please state your name and address.
My name is Paul R. Herbert. My business address is 207 Senate Avenue,
Camp Hill, Pennsylvania.
By whom are you employed?
I am employed by Gannett Fleming, Inc.
Are you the same Paul R. Herbert that submit ted direct test imony in this
case?
Yes. I submitted Statement No. 7 and Exhibit No. 7-A concerning cost of
service allocation and the proposed rate design for the Northeast Wastewater
Operations.
What is the subject of your rebuttal test imony?
I will address the cost of service allocation issues raised by OTS witness
Joseph Kubas and the rate design proposal of OCA witness Scott Rubin
concerning the residential customer charge.
Please address Mr. Kubas' cost al location revision.
Mr. Kubas corrects my cost allocation study to reflect a more accurate
estimate for I&I. He uses a 3% Infiltration and Inflow (l&l) factor based on the
information contained in OTS Exhibit No. 3. Upon review of the information in
OTS Exhibit No. 3, it appears that the data for 2009 may be unreliable
i because the l&l amounts are actually negative for Lehman Pike. I calculate a
2 4.29% l&l percentage for 2008 and a 7.68% l&l percentage for the 4 months
3 of 2010. Based on this data, I would estimate a 5% l&l percentage that would
4 more closely reflect actual l&l flows.
5 Q. How does this revised estimate of l&l f lows affect the results of you cost
6 al location study?
7 A. The result of using a 5% l&l factor would shift approximately $60,000 of costs
8 from residential to the commercia l class. See revised cost allocation based
on a 5% l&l factor attached as Exhibit No. 7-R-1.
W i l l y o u rev ise y o u r rate d e s i g n p r o p o s a l based o n the rev ised cos t
a l l oca t i on resu l t s?
Yes. I will discuss the revised rate design later in my rebuttal testimony.
Wha t is Mr. R u b i n ' s p r o p o s a l w i t h respec t to the res iden t ia l c u s t o m e r
c h a r g e ?
Mr. Rubin recommends that the residential customer charge should not
exceed $6.70 per month.
Wha t is the C o m p a n y ' s p r o p o s a l ?
The Company proposed a monthly residential customer charge of $20.00 per
month with no al lowance. The existing charge for Blue Mountain is $20.00
per month which includes a 2,667 gallon al lowance. The existing charge for
Lehman Pike is $9.45 per month and the Winona Lakes flat rate charge is
22 $27.33 per month.
9
10
11
12
13
14
15
16
17
18
19
20
21
Q
A.
Q.
A.
Q
A.
- 2 -
i Q. Do you agree wi th Mr. Rubin's recommendation?
2 A. No, I do not. First, for Blue Mountain, the existing customer charge is $20.00
3 per month with a 2,667 gallon allowance. If you remove the value of the 2,667
4 gallon allowance at the existing first block consumption rate of $1.75 per
5 thousand gallons, the effective existing customer charge is $15.33 per month.
6 {$20.00 - $1.75 x 2.667 = $15.33). Mr. Rubin's recommended rate of $6.70
7 per month would be a decrease of 76.7% from the $15.33 charge.
8 For Lehman Pike, the existing customer charge is $9.45 per month with
9 no allowance. Mr. Rubin's recommended rate of $6.70 per month would be a
to decrease of 29 .1% from the $9.45 charge.
n For Winona Lakes, the existing flat rate charge is $27.33 per month
12 including all usage. If you remove the value of an average use of 4,000
13 gallons at $3.00 per thousand, the effective customer charge would be $15.33
H per month. ($27.33 - $3.00 x 4). Mr. Rubin's recommended rate of $6.70 per
15 month would be a decrease of 76.7% from the $15.33 effective charge.
16 Q. What is your opinion of Mr. Rubin's recommended decreases in
iv customer charges?
is A. It makes no sense to reduce the customer charge by any percentage when
19 the overall increase is approximately 231.5%. Customers have been paying
20 either $9.45, $20.00, or $27.33 per month under the existing rate structure.
21 To reduce this minimum bill to $6.70 will place an even greater burden on
22 those customers that have just average usage while at the same t ime, give
23 customers with little or no usage large decreases. I think that this kind of
- 3 -
i change is particularly inappropriate where there are, as here, a meaningful
2 number of customers who are weekend or partial-year residents.
3 Q. For what other reasons do you disagree wi th Mr. Rubin's
4 recommendation?
5 A. Mr. Rubin excludes uncollectible accounts expense and costs associated with
6 l&l from the customer charge. I will address each of these items separately.
7 Mr. Rubin excluded the costs associated with uncollectible accounts of
8 $77,774 from his customer charge, As a result, nearly 100% of these costs
9 would be recovered in the volumetric charge under his proposal. (Mr. Rubin's
io 2.7% factor would include only about 15 cents per month in his customer
11 charge).
12 Q. Do uncollectible accounts vary wi th usage?
13 A. No, they do not. Uncoiiectible accounts vary with the number of customers
14 and the occurrence of uncollectible accounts closely tracks how many
15 customers are on the system, not the total volume. Large commercial
J6 customers for example typically pay their bills on t ime and do not cause any
17 uncollectible account expense, but Mr. Rubin would have such customers pay
is a disproportionate share of uncoiiectible accounts expense by recovering such
19 costs almost entirely in the volumetric charge. By including such costs in the
20 customer charge, however, each customer pays a small amount each month
21 to cover uncollectible expense and customers with relatively higher usage are
22 not required to pay a disproportionate amount of such costs.
- 4 -
i Q. Please explain Mr. Rubin's reason for excluding l&l costs from the
2 customer charge.
3 A. Mr. Rubin excludes l&l costs from the customer charge because he contends
4 that l&l costs are not incurred when a new customer is added to the system.
5 Q. Do you agree wi th that statement?
6 A. No, I do not. Mr. Rubin adequately describes the causes of l&l in the system
7 on pages 5 and 6 of his direct testimony. These causes include groundwater
8 entering the system through broken pipes, defective pipe joints, illegal
9 connection of foundation drains, leaks through manholes and manhole
io covers, and possible cross connections with storm sewers. All of these
n causes of l&l are directly related to adding new customers. In fact, they are
12 the predominant cause of additional l&l flow. When the collection system is
13 extended to add new customers, you have more pipe in the ground with the
14 potential for defective joints, added service laterals where additional joints are
15 created, additional manholes for potential leakage, additional property-owners
16 who may connect their downspouts or foundation drains, and additional storm
n sewers that potentially could lead to cross connections. Mr. Rubin is simply
is wrong that additional customers do not cause additional l&l flow.
19 Q. Is it proper to recover a port ion of the costs associated wi th l&l f low in
20 the c u s t o m e r cha rge?
2i A. Yes, it is. In the text "Financing and Charges for Wastewater Systems",
22 published by the Water Environment Federation (WEF), Chapter 8,
- 5 -
i "Deveiopment and Design of a Schedule of Rates and Charges", discusses
2 fixed charges on pages 146 and 147, where it states:
3 "Finally, a meter charge and service charge may be combined
4 with a quantity allowance to establish a minimum charge. In 5 this case, a fixed charge could recover all or a portion of 6 volume-related costs (including infiltration and inflow [I/I] costs 7 allocated on a customer basis) as part of the minimum." 8
9 Further in the same chapter discussing fixed charges, on page 154, it io states; n 12 "For those rate designs that include a fixed charge, additional 13 revenue stability may be achieved by recovering some of H those costs allocated to volume and strength parameters 15 through the customer charge. For example, I/I costs allocated 16 in proportion to customers are often recovered through the 17 fixed-charge component." 18
19 Q. How do you propose to recover the costs associated wi th l&l f low?
20 A. Consistent with the text, "Financing and Charges for Wastewater Systems", I
21 have allocated two-thirds of the costs associated with l&l flow to customer
22 charges and one-third to volume charges. The one-third of l&l costs to the
23 volume charge recognizes that larger customers have larger impervious areas
24 such as parking lots and roof tops which cause additional runoff.
25 The two-thirds allocation of l&l costs to the customer charge is
26 appropriate and properly reflects the cost causation of l&l f low and the fixed
27 cost recovery of such costs. Based on my revised cost alfocation study, the
28 revised customer costs with the lower l&l costs result in a monthly cost of
29 $9.54. I would recommend the Company's originally proposed customer
30 charge of $20.00 per month be lowered to $15.00 to avoid substantially
31 decreasing the effective existing rate. The proposed commercial customer
32 charge will be lowered from $40 per month to $30 per month. The volume
- 6 -
i rate will be increased to recover the lost revenue as a result of lowering the
2 customer charges.
3 Q. Are customer charges for sewer uti l i t ies in Pennsylvania common at this
4 level?
5 A. Yes. See the attached Exhibit No. 7-R-2, which shows a summary of the
6 Commission-approved rates for Pennsylvania sewer utilities. The applicable
7 tariff pages are also attached. Most of the customer charges shown on the
s summary far exceed the $15.00 per month customer charge proposed for
9 Northeast.
to Q. What do you recommend regarding Mr. Rubin's proposed $6.70
11 customer charge?
12 A. I recommend that it be rejected.
13 Q. Please comment on Mr. Rubin's recommendation for low-income
14 customers.
is A. The Company proposed a customer charge for low income customers of
16 $7.00 per month or 35% of the $20.00 originally proposed residential
17 customer charge. Consistent with lowering the proposed customer charge to
18 $15.00 explained above, the low income rate would also be lowered to $5.25
19 or a $9.75 monthly reduction for low income customers. This is consistent with
20 the Company's water tariff for low income customers.
21 Mr Rubin suggests an alternative calculation for low income users
22 because his recommended customer charge of $6.70 per month is too low.
23 At 35% of his $6.70, the low income charge would be $2.35 or only a $4.35
24 reduction in the bill. This is another reason to reject Mr. Rubin's
- 7 -
i recommendation. To remedy this, Mr. Rubin recommends a 15% reduction in
2 the total bill for low income customers. This method would produce different
3 reductions for each customer depending on the level of usage.
4 The Company's low income tariff is straight forward, is consistent with
5 the water tariff, and provides a significant and uniform reduction for each low
6 income customer. The Company's revised proposal should be approved and
7 Mr. Rubin's recommendation should be rejected.
8 Q. Does this complete your rebuttal test imony at this t ime?
9 A. Yes, it does.
- 8 -
EXHIBIT NO. 7-R-l (Northeast)
EXHIBIT NO. 7-R-l WITNESS: P, R. HERBERT
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
HERSHEY, PENNSYLVANIA
REVISED
COST OF SERVICE ALLOCATION STUDY
AS OF DECEMBER 31, 2010
AND
PROPOSED CUSTOMER RATES
Gannett Fleming Ualuatinn and Rate Diulsion
Harrisburg, Pennsylvania
052138
Calgary, Alberta Valley Forge, Pennsylvania
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS - REVISED
COMPARISON OF COST OF SERVICE WITH REVENUES UNDER PRESENT AND PROPOSED RATES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2010
Proposed Increase
Cuslomer
Classification
(D
Residential*
Commerciar*
Total Sales
Other Revenues
Total
Cost of Service
Amount"" (2)
$ 2,514,631
365,761
2,880.392
92,916
$ 2.973,308
Percent (3)
87.3%
12.7%
100.0%
Revenues, Pre
Amount
$
$
(4)
776,683
69.829
846,512
27,307
873,819
sent Rates Percent
(5)
91.8%
8.2%
100.0%
Revenues, Prop
Amount (6)
$2,546,725
333,915
2,880.640
92,916
$ 2,973,556
osed Rates
Percent
(7)
88.4%
11.6%
100.0%
Amount (8)
$ 1,770.042
264,086
2,034,128
65,609
$ 2,099,737
Percent
increase
(9)
227,9%
378.2%
240.3%
240,3%
240.3%
* Includes revenue from Unmetered Sales.
" ' Includes revenue from Unmetered Sales.
'"Revised based on 95% flow and 5% l&l.
o (D Q. C_ fP >
PENNSYLVANIA AMERICAN WATER COMPANY
WASTEWATER OPERATIONS
ALLOCATION OF COST OF SERVICE BY FUNCTION TO CUSTOMER CLASSIFICATIONS
NJ
Description
(1)
Total Cost of Service
Factor Reference
Residential Factor Cost of Service
Commercial Factor Cost of Service
Total
Flow (2)
$ 2,440,367
A
0.8543 $ 2,084.805
0.1457 S 355,561
2.440,366
Infiltration &
$
Inflow (5)
128,437
D
0.9491 121,899
0.0509 6.537
128,436
Customer Facilities
(6)
$ 194,840
B
0.9833 191,586
0.0167 $ 3,254
194,840
Customer Accounting
(7)
$ 116,749
c
0.9965 116,341
0.0035 409
116,750
$
$
$
Total (8}
2,880,393
2.514.631
365.761
2,880,392
cn o rr
Q .
CD
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
FACTORS FOR ALLOCATING COSTS BY FUNCTION TO CUSTOMER CLASSIFICATIONS
FACTOR A, ALLOCATION OF FLOW COSTS.
Factors are based on the pro forma test year average daily consumption for each customer classification.
Classification
Average Daily Consumption,
100 gallons
(1) (2)
Residential Cammercial
Total
3.540 604
4.144
Allocation Factor
(3)
0.8543 0.1457
1.0000
FACTOR B. ALLOCATION OF COSTS ASSOCIATED WITH CUSTOMER FACILITIES.
Factors are based on the estimated relative cost of customer facilities, as follows:
Schedule C Page 1 of 4
Customer Classification
Residential Commercial
Total
Service Equivalents
(2)
3.425 58_
3,483
Allocation Factor
(3)
0.9833 0.0167
1.0000
- 3 -
Schedule C Page 2 of 4
PENNSYLVANIA WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
BASIS FOR ALLOCATING CUSTOMER FACILITIES TO CUSTOMER CLASSIFICATIONS
5/8
Residential Commercial Total Meter 5/8" Number of Number of Number of Size Equivalent Meters Weighting Meters Weighting Meters Weighting (1) (2) (3) (4)=(2)X(3) (5) (6)=(2)X(5) (17) (18)
1,0 3,425 3,425 7 3.432 3,432
3/4 1.5
2.5
1-1/2 5.0
8.0 21 21
15.0
25,0 25 25
50.0
80.0
10
Total
115.0
3,425 3.425 12 58 3.437 3,483
- 4 -
S c h e d u l e C
Page 3 of 4
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
FACTORS FOR ALLOCATING COSTS BY FUNCTION TO CUSTOMER CLASSIFICATIONS
FACTOR C. ALLOCATION OF COSTS ASSOCIATED WITH BILLING AND COLLECTING.
Factors are based on the number of customers.
Customer Number of Allocation Classification Customers Factor
(D (2) (3)
Residential 3,425 0.9965 Commercial 12 0.0035
Total 3,437 1.0000
- 5 -
Schedule C Page 4 of 4
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
FACTORS FOR ALLOCATING COSTS BY FUNCTION TO CUSTOMER CLASSIFICATIONS
FACTOR D. ALLOCATION OF COSTS ASSOCIATED WITH INFILTRATION AND INFLOW.
Factors are based on a 1/3-2/3 weighting of flow and number of customers.
Customer Classification
(1)
Residential Commercial
Total
Average Daily Flow Factor A
(2)
0.8543 0.1457
1.0000
(3) Weight
=(2) x 0,3333
0,2847 0.0486
0.3333
Number of Customers Factor C
(4)
0.9965 0.0035
1.0000
(5)-Weight
=(4) x 0.6667
0.6644 0 0023
0.6667
Allocation Factor
(6)*{3)+{5)
0.9491 0,0509
1.0000
- 6 -
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
COST OF SERVICE FOR THE TWELVE MONTHS ENDING DECEMBER 31, 2010, ALLOCATED TO COST FUNCTIONS
Factor Ref. Account
(1) (2) OPERATION AND MAINTENANCE EXPENSES
Cos! of Service
(3) Flow (4)
Infiilration & Inflow
(7)
Customer Facililies
(8)
Customer Accounting
(9)
^J
COLLECTION 615.1 Purchased Power 616.1 Purchased Fuel 633.1 Contract Services - Legal 675.1 Miscellaneous Operating Expense 675.1 Miscellaneous Maintenance Expense
TOTAL COLLECTION EXPENSE - OPERATION
SEWAGE TREATMENT 601.3 Salary and Wages 601.4 Salary and Wages 615.3 Purchased Water 618.3 Chemicals 620.3 Materials and Supplies - Operation 631.3 Contract Services • Engineering 633.3 Contract Services - Legal 634.3 Contraci Services - Management 635.3 Conlract Services Tes! 636.3 Contract Services - Operation 641.3 Rental of Building 642.3 Rental ot Equipmenl 650.3 Transporlaiion 620.4 Materials and Supplies - Maintenance 636,4 Conirac! Services - Maintenance 675.4 Misc. Maintenance Expense 675.3 Misc. Operaiing Expense
TOTAL SEWAGE TREATMENT EXPENSE
1 0
1 0 1 726 1 1.038
1 992 2,756
1 157.378
1 159 1 113,804 1 24,144
1 0
1 0 1 0 1 0 1 15.870
^ 0
1 0 1 0
1 0 1 2.590
1 0 1 14,685
1 147.100
0 0
690 986 942
2.618
149,509
151 108,114 22,937
0 0 0 0
15,077
0 0 0 0
2,461 0
13,951 139.745
0 0 36 52 50 138
7,869
8 5,690 1.207
0 0 0 0
794 0 0 0 0
130 0
734 7,355
0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
475.730 451.944 23.787
- o CO to o to zr (D A)
a at
P E N N S Y L V A N I A A M E R I C A N W A T E R C O M P A N Y
NORTHEAST WASTEWATER OPERATIONS
C O S T OF S E R V I C E FOR T H E T W E L V E M O N T H S E N D I N G D E C E M B E R 3 1 , 2010, A L L O C A T E D T O C O S T F U N C T I O N S
CO
Account
(D
TRANSMISSION 6015 Salary and Wages 601.6 Salary and Wages 504.5 Employee Pension and Benefits 615.5 Purchased Power 620.5 Materials and Supplies 631-5 Contract Services - Engineering 636.5 Conlract Services 641.5 Rental of Building 642.5 Rental of Equipmenl 650-5 Transportation
Miscellanous Operating Expenes TOTAL T & D EXPENSE OPERATION
620.6 Materials and Supplies 636.6 Contract Services 675.6 Miscellaneous Maintenance £xpense 675.5 Miscellaneous Operating Expense
TOTAL T & D EXPENSE - MAINTENANCE
Factor Ref. (2)
Cost ol Service
(3)
0 6,408
0 0 0 0 0 0 0 0 0
6.408
3,347 0
26.750 0
30,097
Flow (4)
0 6,088
0 0 0 0 0 0 0 0 0
6,068
3,180 0
25,413 0
28.592
Infiltration & Inflow
(7)
0 320
0 0 0 0 0 0 0 0 0
320
167 0
1,338 0
1,505
Cuslomer Facilities
(8)
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
Cuslomer Accounting
(9)
TOTAL T & D EXPENSE 36,505 34,680 1,826
Tl cu
CO (D NJ O
CO O r r CD CL C_ CO
(ji O
P E N N S Y L V A N I A A M E R I C A N W A T E R C O M P A N Y
NORTHEAST WASTEWATER OPERATIONS
C O S T O F S E R V I C E FOR THE T W E L V E M O N T H S E N D I N G D E C E M B E R 3 1 . 2010 . A L L O C A T E D T O C O S T F U N C T I O N S
Account
(1)
CUSTOMER ACCOUNTS 601,7 Salary and Wages 620,7 Materials and Supplies 633.7 Conlract Services - Legal 634.7 Conlract Services- Management 636.7 Contract Services 642.7 Rental of Equipment 650.7 Transporation 657.7 Insurance 670.7 Bad Debts 675.7 Miscellaneous Expense
TOTAL CUSTOMER ACCOUNTING EXPENSE
Factor Ref. (2)
3 3 3 3 3 3 3 3 3 3
Cost of Service
(3)
0 0 0 0 0 0 0 0
77,774 2,741
Flow (4)
Infiltration & Inflow
(7)
Customer Facilities
(8)
Customer Accounting
(9)
0 0 0 0 0 0 0 0
77,774 2,741
80,515 80,515
CD ADMINISTRATIVE AND GENERAL EXPENSES 601.8 Salaries and Wages 603.8 Salaries of Officiers 604.8 Employee Pension & Benefils 615.8 Purchased Power 620.6 Materials and Supplies 631,8 Contract Services 632.8 Contract Services - Accounting 633.8 Contract Services • Legal 634.8 Contract Services - Management 635.8 Conlract Services - Test 636.8 Contract Services 641.8 Rental of Building 642.8 Rental of Equipment 650.8 TransporTaiion 656.8 Insurance - Vehicles
4 4 5 4 4 4 4 4 4 4 4 4 4 4 4
56,400 0
52,669 0 0 0 0 0 0 0 0 0 0
19,816 0
44,150 0
47.787 0 0 0 0 0 0 0 0 0 0
15,512 0
2,324 0
2.512 0 0 0 0 0 0 0 0 0 0
816 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
9,926 0
2,370 0 0 0 0 0 0 0 0 0 0
3,488 0
T l (U (O at OJ
o
(D o . j fD Q.
r fD
CD D
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
COST OF SERVICE FOR THE TWELVE MONTHS ENDING DECEMBER 31, 2010, ALLOCATED TO COST FUNCTIONS
657.8 658.8 659.8 660.8 666.8 667.8 675,8
Account
d) Insurance - Vehicles Workers Compensation Insurance Advertising Amortization ol Rale Case Regulaiory Commission Miscellaneous Expense TOTAL A & G EXPENSE
Factor Ref. (2) 4 5 4 4 8 4 4
Cosi of Service
(3) 0 0 0 0
76,484 0
3.542
Flow (4)
0 0 0 0
64,644 0
2.773
Infiltration & Inflow
(7) 0 0 0 0
3,404 0
146
Customer Facilities
(8) 0 0 0 0
3,067 0 0
Customer Accounting
(9) 0 0 0 0
5,369 0
623
208,911 174.865 9,202 3.067 21,777
Total Operation & Maintenance Expenses
DEPRECIATION EXPENSE 354.20 Structures and Improvements - Collection 354.30 Structures and Improvements - Pumping 354,40 Structures and Improvements • Treatmenl 354.70 Slruclures and Improvements - General 355.00 Power Generation Equipment 360.10 Collection Sewers - Force Mains 361.10 Colleciion Sewers - Gravity Mains 361.20 Manholes 363.00 Services 364.00 Flow Measuring Devices 371,00 Pumping Equipmenl 380.00 Trealmenl Equipment 381.00 Plant Sewers 382.00 Outfall Sewer Lines 390.00 OHice Fumitute and Equipment 391.00 Transponalion Equipment 393,00 Tools, Shop and Garge Equipment 394.00 Laboratory Equipmenl 396.00 Communications Equipment 397,00 Miscellaneous Equipment
Total Depreciation Expense
804,417 664,107 34,951 3.067 102.292
2
4 4 4 1 4 4
79 24,559
165.776 17.606 3,472
43.425 2,424 4,547
46,318 1,436
22,867 229.658
12.993 6.873
699 1,724
246 5.103
20.261 500
610.566
75 23.331
157,487 14.953 3,298
41,254 2.303 4,320
0 1.364
21.724 218.175
12,343 6.530
547 1.350
193 4,848
15.860 391
530,345
4 1.228 8.289
787 174
2.171 121 227
0 72
1.143 11,483
650 344 29 71 10
255 835
21
27,913
0 0 0
1,701 0 0 0 0
46,318 0 0 0 0 0 0 0 0 0 0 0
48.019
0 0 0
165 0 0 0 0 0 0 0 0 0 0
123 303 43
0 3.566
88
4.289
T) ID
(O m ^ O
U l
w o ) <D
Q. r fp
O
PENNSYLVANIA AMERICAN WATER COMPANY
NORTHEAST WASTEWATER OPERATIONS
COST OF SERVICE FOR THE TWELVE MONTHS ENDING DECEMBER 31. 2010, ALLOCATED TO COST FUNCTIONS
Account
0)
Taxes O the r T h a n I n c o m e
685100 Utility Reg Assessment Fee
685200 Properly Taxes
685320 Payrol l Taxes
Total Taxes, Other Than Income
Total Operating Expense
4091 Income Taxes
Utility Income Available for Return
Total Cost of Service
Less: Other Waler Revenues
Total Cost of Service Related to Sales of Wastewater Services
Factor Ref. (2)
6 7 5
7
7
8
Cost of Service
(3)
18.143 112.218
17.850
148,211
1,563.194
455,852
954,263
2,973,309
(92,916)
2.880,393
Flow (A)
15,334 95.307 16,195
126.837
1.321.289
387.155
810.456
2,518.899
(78,533)
2,440.367
Infiltration & inflow
V)
807 5.016
851
6.675
69.539
20,377
42.655
132,571
(4,135)
126.437
Customer Facilities
(8)
728 10.818
0
11.545
62.631
43.944
91.991
198,566
(3,726)
194,840
Cuslomer Accounting
(9)
1,274 1,077
803
3,154
109,735
4.376
9,161
123,272
(6.523)
116,749
T ) CO QJ O
CQ zr (D CD
cn O
PENNSYLVANIA AMERICAN WATER NORTHEAST WASTEWATER OPERATIONS
FACTORS FOR ALLOCATING COST OF SERVICE TO COST FUNCTIONS
NJ
Reference
Factor 1 - Flow and l&l
Factor 2 - Cuslomer Facilities
Factor 3 - Cuslomer Accounting
Factor 4 - O&M Exp less Power and Chemicals Cost Factor
Factor 5 - Labor Expense Cosi Factor
Factor 6 - Rale Base less Allocated Costs Cost Factor
Factor 7 - Rate Base Cost Factor
Factor 8 - Total Cost of Service Cost Factor
Factor 9 - O&M Exp Cost Factor
Flow
0.9500
358,191 0.7828
199,698 0.9073
9.845.745 0.8493
9,159,260
0.8493
1.241,310 0.8452
664,107
0.8256
infiltration & Inflow
0.0500
18,852 0.0412
10.521 0.0477
518,197 0.0447
482,065 0.0447
65.328 0.0445
34,951 0.0434
Customer Facilities
1.0000
0 0 0 0 0 0
0 0.0000
1,120,018
0.0966
1,039,698 0.0964
58.836 0.0401
3.067
0.0038
Customer Accounting
1.0000
80,515 0.1760
9.926 0.0450
106.652 0.0094
103.988 0.0096
103.092 0.0702
102,292
0.1272
Total
1.0000
1.0000
1.0000
457,558 1.0000
220,345 1.0000
11,592.613 1.0000
10,785,011 1.0000
1.468.567 1.0000
804.417
1,0000
ta o CQ 3 -fD fD _,. Q .
a<D ro m
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
COST OF SERVICE FOR THE TWELVE MONTHS ENDING DECEMBER 31, 2010, ALLOCATED TO COST FUNCTIONS
Co
Accounl
(1) RATE BASE 353 20 353.30 353.40 354.20 354.30 354.40 354.70 355.00 360.10 361,10 351.20 363.00 364.00 371.00 380.00 381.00 382.00 390.00 391.00 393 00 394 00 396.00 397 00
Land and Land Rights • Collection Land and Land Rights - Pumping Land and Land Rights • Treatment Slruclures and Improvements - Collection Structures and Improvements • Pumping Structures and Improvements - Treatment Structures and Improvements - General power Generation Equipment Collection Sewers - Force Mains Colleciion Sewers - Gravity Mains Manholes Sen/ices Flow Measuring Devices Pumping Equipment Treatmenl Equipment pfanl Sewers Oultall Sewer Lines Office Furniture and Equipment Tiansporlalion Equipmenl Tools, Shop and Garge Equipment Laboratory Equipmenl Communications Equipment
Miscellaneous Equipmenl
TOTAL UTILITY PLANT IN SERVICE SEWER
Factor Ret. (2)
4
2
4 4 4 1 4
4
Cosi Of Service
(3)
3 3 3
2,555 141.019
3.106,913 376,884
41.201 1,719,462
107.617 129.509
1.120,018 28,075
554,597 3,342,640
541.405 71,059 12,356 22,500 4.063
58,191 192.480
9,060
11.592,613
Flow (4)
3 3 3
2.427 133,968
2.951.567 295,025
39,141 1,633,489
102.426 123,034
0 26,671
526,867 3.175.508
514,335 68,266 9,672
17.613 3,181
64.781 150,673
7.092
9,845,746
Infiltration & Inflow
(7)
0 0 0
128 7.051
155,345 15,528 2.060
85.973 5.391 6,475
0 1.404
27,730 167.132
27.070 3,593
509 927 167
3.410 7,930
373
518.197
Customer Facilities
(8)
0 0
u 0 0 0 0 0 0 0 0
1.120,018 0 0 0 0 0 0 0 0 0 0
0
1,120.018
Cuslomer Accounting
(9)
0 0 0 0 0 0
66,332 0 0 0 0 0 0 0 0 0 0
2.175 3,960
715 0
33.876 1,595
108,652
Other Rale Base Ilems:
Cash Working Capital Materials and Supplies Deferred. Accrued and Prepaid Taxes
Total Olher Raie Base Etemems
Total Original Cost Measure o l Value
9 6 6
24,849 4.190
(836,641)
(807.602}
10,785,011
20.515 3.559
(710,559)
(686,485)
9,159,260
1,078 187
(37,398)
(36,132)
482.065
94 405
(80.820)
(80,320)
1,039.698
3.161 39
(7.864)
(4.664)
103.988
TJ (fi Q) o
(Q I T (D fD
a « » ro m
Schedule F
PENNSYLVANIA AMERICAN WATER NORTHEAST WASTEWATER OPERATIONS
CALCULATION OF CUSTOMER COST PER MONTH
Per Month
(1) Cost Related to Customer Facilities $194,840
(2) Meter Equivalents X 12' 41,800
(3) Cost per Bill - Meter related $4.66
(4) Cost Related to Customer Accounting 116,749
(5) Number of Bills 41,249
(6) Cost per Bill $2.83
(7) Cost Related to l&l 128,437
(8) Percentage of l&l Costs to Customer Charge 67%
(9) Cost Related to l&f allocated to Customer Charge 85,629
(10) Meter Equivalents X 12 41,800
(11) Cost per Bill - l&l Related S2.05
(12) Total Customer Costs (3)+(6) $9,54
- 1 4 -
Schedule G
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
SUMMARY OF PRESENT AND PROPOSED RATES FOR THE TWELVE MONTHS ENDED DECEMBER 31. 2009
Present Rales
Customer Class Monthly
Customer Charge
Lehman Pike
Usage Charge Per 100 Gallons
Proposed Rates Monthly
Customer Charge Usage Charge
Per 100 Gallons
Residenttal 5/8" & 3/4" 5/8" & 3/4" Low Income 1" 1 I T T 3-4" 6"
$9.45 9.45 15.75 31.50 50.40 94.50 157,50 315.00
$0.2690 $0.2690 $0.2690 $0.2690 $0.2690 $0.2690 $0.2690 $0.2690
$15.00 5.25 15.00 15.00 15,00 15,00 15.00 15.00
$1.4970 $1.4970 $1.4970 $1,4970 $1.4970 $1.4970 $1.4970 $1.4970
Residential Flat Rate
Commercial 5/8" & 3/4" 1" 1 I T T 3" 4" 6"
21.56 71.89
9.45 15.75 31.50 50,40 94.50 157.50 315.00
0,2960 0,2960 0.2960 0.2960 0.2960 0.2960 0.2960
30,00 30.00 30.00 30.00 30.00 30.00 30.00
1.4970 1.4970 1.4970 1.4970 1.4970 1,4970 1.4970
Availability Charge
Winona Lakes
Customer Charge Customer Charge - Low Income Availability Charge
Blue Mountain
ReskJential and Commercial Customer Charge Customer Charge - Low Income Commercial Cuslomer Charge
Minimum (2,667 gallons) Next 2.333 gallons or First 5,000 gallons All Over 5.000 galtons
7.00
27.33 27.33 15.00
20.00 20.00
15.00 5.25
1,4970 1,4970
. 0.1750 0.3000
15.00 5.25
30.00
NA 1.4970 J.4970
- 15-
PENNSYLVANIA AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
SUMMARY OF REVENUE UNDER PRESENT AND PROPOSED RATES FOR THE TWELVE MONTHS ENDED DECEMBER 31. 2010
Customer Classification
;i)
Proforma Present
Rates Revenue 12/31/2010
(2)
Bill Analysis Revenues at
Present Rates (3)
Adjustment Factor
(4)=(2)/(3)
Bill Analysis Revenues
Proposed Rates (5)
Revenues Under Proposed Rates
(6}=(5)x{4)
O)
Residential Commercial
Total Sales
Other Operating Revenues
3776,683 69.829
$846,512
27,307
$776,607 69,874
$846,481
27,307
1.00009747
0.99935411
$2,546,476
334,131
$2,880,607
92.916
$2,546,725
333,915
$2,880,640
92,916
Total $ 873,819 873,788 $ 2,973,523 2,973,556
o IT fD
a. c_
Schedule
PENNSYLVANIA-AMERICAN WATER COMPANY NORTHEAST WASTEWATER OPERATIONS
SUMMARY OF APPLICATION OF PRESENT RATES TO CUSTOMER BILL ANALYSIS FOR THE TWELVE MONTHS ENDING DECEMBER 31, 2010
Total Rate Zone (1)
Present Rate Application
Lehman Pike Winona Lakes Blue Mountain
Total
Prooosed Rate ADDlication
Lehman Pike Winona Lakes Blue Mountain
Total
Residential (2)
$527,745 27,367
221,495
776,607
$1,756,991 68,629
720,856
2,546,476
Commercial (3)
$69,623
251
69,874
$333,400
731
334,131
(4)
$597,368 27.367
221,746
846,481
$2,090,390 68,629
721,587_
2,880,607
- 1 7 -
PENNSYLVANIA-AMERICAN WATER COMPANY BLUE MOUNTAIN WASTEWATER OPERATIONS
APPLICATION OF PRESENT RATES AND PROPOSED RATES TO CONSUMPTION ANALYSIS YEAR ENDED DECEMBER 31, 2010
Schedule J Page 1 of 3
Rate Block 100 Gallons
(1)
Service Charge w/ Minimum 2.667 gallons Low Income
Next 2.333 gallons or First 5,000 gallons All Over 5,000 gallons
Subtotal
Total Residential
Number Of Bills
(2)
8,807 108
0
8.915
Present Toial
Consumption
O)
Residential -
199.052 2.441
113.906 77.505
191.411
392.904
Commercial
Present Rate (4)
Monihlv
20.00 20,00
0.1750 0.3000
- Monthlv
Revenue (5)
176,149 2.160
19.934 23,252 43.186
221,495
Proposed Total
Consumplion (6)
315,399 77,505
392,904
392.904
Proposed Rate (?)
15.00 5,25
1 4970 1 4970
Proposed Revenue
(6)
132.112 567
472.152 116,025 588,177
720.856
Service Charge w/ Minimum 2.667 gallons 10 101 20,00 204 30.00 306
Next 2.333 gallons or First 5,000 gallons All Over 5,000 gallons
Subtotal
Total Commercial
Total Blue Mountain
0
10
8.926
63 120 183
284
393.188
0.1750 0.3000
11 36 47
251
221.746
164 120 284
284
1.4970 1.4970 __
246 180 425
731
721,587
- 1 8 -
Schedule J Page 2 of 3
PENNSYLVANIA-AMERICAN WATER COMPANY LEHMAN PIKE WASTEWATER OPERATIONS
APPLICATION OF PRESENT RATES AND PROPOSED RATES TO CONSUMPTION ANALYSIS YEAR ENDED DECEMBER 31, 2010
Rate Block 100 Gallons
(1)
Customer Charge Low Income
All Usage Subtotal
Total Residential
Number Of Bills
(2)
30,419 600
0 0
31,019
Total Consumption
(3)
Residential
858,700 858,700
858,700
Present Rate (4)
- Monthlv
9.45 9.45
0.2690
Revenue (5)
287,463 5,670
230,990 230,990
524,123
Proposed Rate (6)
15,00 5.25
1,4970
Proposed Revenue
(7)
456,290 3,150
1,285,474 1,285,474
1,744,913
Residential Monthly - Flat Rate
Customer Charge
Total - Residential
Customer Charge 5/8" & 3/4" 1" 2" 4"
168
31,187
69 22 32 12
858,700
Commercial
21.56
- Monthlv
9.45 15,75 50.40
157.50
3,622
527,745
651 347
1,613 1,890
71,89
30.00 30,00 30.00 30.00
12,078
1,756,991
2,066 660 960 360
Total - Service Charge 135 4,500 4,046
All Usage Subtotal
Total Commercial
0 • 0
135
Customer Charge 6,403
220,009 0.2960 65,123 220,009 65,123
220,009 69.623
Availabiiitv Charge - Monthly
7.00 44,822
1.4970
000
329,353 329,353
333,400
Total - Lehman Pike 37,725 1,073,709 642,189 2,090,390
- 1 9 -
PENNSYLVANIA-AMERICAN WATER COMPANY WINONA LAKES WASTEWATER OPERATIONS
APPLICATION OF PRESENT RATES AND PROPOSED RATES TO CONSUMPTION ANALYSIS YEAR ENDED DECEMBER 31. 2010
Schedule J Page 3 of 3
Rate Block 100 Gallons
Customer Charge Low Income
All Usage Subtotal
Total Residential
Sen/ice Charge
Number Ol Bills
(2)
989 12
0 0
1.001
192
Present Consumption
(3)
35,459 430
0 0
35.689
Present Rate Revenue (4) (5)
Residemial - Monthly
27.33 27,039 27.33 328
0.0000 0 0
27.367
Availability Charqe
0.00 0
Proposed Consumption
(6)
35.889 35,889
35.889
0
Proposed Rate (?)
15.00 5.25
1.4970
0.00
Proposed Revenue
(8)
14,840 63
53,726 53,726
68,629
0
Total Winona Lakes 1,193 35,889 27.367 35.889 68.629
- 2 0 -
EXHIBIT NO. 7-R-2 (Northeast)
E x h i b i t No. 7 -R-2 Page I of 2
Monthly Residential Rates for Sewer by Company
Company Name Flat Rate
Meter Minimum Size Charge EDU
Charge Per Usage Amounl 1,000 Gallons 1,000 Gallons
Cecil Wastewater Treatment Company Inc
Clean Treatment Sewage Company
Delaware Sewer Company
Glendale Yoaround Sewer Company
Johns town Regional Sewage
Litt le Wash ing ton Wastewater Company Pinecrest Division - Inside Development
Pinecrest Division - Outside Devetopment
Willistown Woods Division
Gettysburg Division
East Bradford Division
Twin Hiils Division
Plumsock Division
Media Division
3rtd!ewood Division - Family Homes Bridlewood Division - Townhomes
While Haven Division • Metered White Haven Division - Unmetered
Eagle Rock Division - Step 1 Eayle Rock Division - Step 2
Thornhurst Division - Step 1 Thornhursl Division - Step 2
Thornhurst Division - Unmetered
Rivercrest Division
Little Washington Division
Laurel Lakes Division - Step 1 Laurel Lakes Division - Slep 2
34,79
58.47
52.00
20.90
41.95 50.00
41.35
35.00
$ 7.25
$ 42.00
$ 44.00
$ 60.00
$ 47.00
$ 60,00
3.62 2.04 1.23 0.87 0.76
0-2,000 2,000-13.333 13,333-33,333 33,333-66,667
66.667-100,000 Over 100,000
2.40
6.13
7.66
1,76
7.91
5/8 3/4
1 1 1/2 2 3 4 6 8
$ S % $ $ $ $ $ $
$ $
$
$ S
$ $
$
$
s $
5.07 7.20
12.82 28.94 51.34
115.60 205.35 461.88 821.10
36,00 31.00
41,35
32.25 35.50
36.00 46.75
27,00
67,00
36.00 44,00
per EDU per EDU
per EDU per EDU
per EDU per EDU
per EDU per EDU
3.20 3,20 3.20 3.20 3.20 3,20 3,20 3.20 3,20
1,52 1.52
1.20
1,20 1,20
0,60 120.00
5.02
5.15
0.60 1.20
E x h i b i t No. 7 -R-2
Page 2 of 2
Monthly Residential Rates tor Sower by Company
Company Name Flal Rate Meter Size
Minimum Charge EDU
Charge Per Usage Amounl 1,000 Gallons 1,000 Gallons
Deerfield Knoll Division
CS Sewer Division $ 20.66
Peddlers View Division
The Greens al Penn Oaks Division
Newlin Green Division
Woodloch Springs Division - Metered Woodloch Springs Division - Unmetered $
Loren K. Dixon Sewer Works $
Manwafamink Sewer Company - Flat Rate $ Manwalamink Sewer Company - Metered Rate
Regent Acres Mobi le Home Park $
Reynolds Disposal Company J
School House Vil lages Wastewater Div is ion $
Schuylk i l l Haven Borough
Pennsylvania Util ity Company
Wonderv iew Sanitary Facil it ies $ 35.65
$ 45.00
S 16.94
3,37
47.00
15.00
26,50
30.75
27.57
45.00
$
$
$
$
$
49,00
90.00
90.00
47.00
10.00
per EDU
per EDU
per EDU per EDU
per EDU
per EDU
4,75
1.50
1.50
1.20
3.98 1.34
6.65
10.62
10,000 Over 10.000
Dic-O6-20O1 15:58 Frga-PUC-PEW nrmi833 T-ESZ P.008/018 F-56r
Cecil wastewater Treatment Company, Inc. P.O. Box 253 Ceoil, PA 15321-0253
suppieanent No. i a t o Sewage-Pa. P.U.C. 1
9th Revised Page Ko. 4 Canceling 8th Revised Pago No* 4
SCHEDULE OF FIAT RATES (I)
^ 1. This Scnoaule Shal/L &p$ly to All Residential Customers.
. • 1
^vas
The Rate S h a l l be i$34-73) a Month,
rl < trsaZ
\A- CI) Indicates Increase
- i
Issued; January 31, 1996 Effective: February 1, 1996
By: Edward B. Monaco President
Supplement No. 14 to S e w e r - P a . P.U.C. No. 1
Fourth Revised Page No. 4 Canceling Second Revised Page No. 4
CLEAN TREATMENT SEWAGE COMPANY And Third Revised Page No. 4
SCHEDULE O F RATES
Application:
This s chedu le is available to all res ident ial a n d non-res ident ia l c u s t o m e r s , a s indicated below.
Charges :
(1) Resident ial Service: ^ (I) (C)
A charge of $ 2 3 . 2 5 pe r m o n t h per lot shall be payable by the owner of e ach lot which is located wi th in the development known a s Marcel Lake E s t a t e s a n d upon which n o s t r u c t u r e h a s been erected. S u c h charge shal l be payable i rrespect ive of the quan t i ty of sewage d ischarged .
A charge of $ 5 8 . 4 7 prer m o n t h per lot shal l be payable by the owner of each lot w m Q h i ^ o c a t e d wi thin the development known a s Marcel Lake Es t a t e s a n d u p o n which a s t r u c t u r e h a s been erected. Such charge shal l be payable irrespective of the quan t i ty of sewage d ischarged.
The t e rm " s t ruc tu re" shal l be deemed to m e a n any bui ld ing connec ted to the sewage collection sys tem a n d conta in ing any one or more of the following fixtures: a w a s h s t a n d , a flush toilet, a b a t h t u b , a shower or a k i t chen faucet.
(2) Non-res ident ia l Service: Per Month (I) (C)
Each Outdoor Pool a n d B a t h h o u s e $ 5 8 . 4 7 Each C l u b h o u s e $ 5 8 . 4 7 Each Associat ion Office or Ma in t enance Bui lding $ 5 8 . 4 7 Each B a t h h o u s e a t Each Lake Site $58 .47
Terms of Payment :
Cha rges will be billed payable monthly . (C)
(1) Indicated Inc rease (C) Indica tes Change
Issued: January 25, 1992 Effective: January 24, 1992
DELAWARE SEWER COMPANY Sewer - Pa. P.U.C. No. 1 Original Page No. 4
SCHEDULE OF RATES
Application:
This schedule is available to all residential customers as indicated below.
Charges:
(1) Residential Service:
A charge o/$52,0(H)er month per lot shall be payable by the owner of each lot which is located within the devefepment known as Wild Acres and upon which a structure has been erected which is connected to the Delaware Sewer Company facilities. Such charge shall be payable irrespective ofthe quantity of sewage discharged.
The term "structure" shall be deemed to mean any building connected to the sewage collection system and containing any one or more ofthe following fixtures; a wash stand, a flush toilet, a bathtub, a shower or a kitchen faucet.
Tenns of Payment:
Charges will be billed payable monthly.
Issued: November 7, 1996 Effective: Novembers , 1996
Sewer-Pa. P.U.C. No. 1 Fifth Revised Page No. 5
GLENDALE YEAROUND SEWER COMPANY Canceling Fourth Revised Page No. 5
SCHEDULE QF RATES (I)
Application
This schedule is available to all customers.
Rates Net Rate Net Rate
Utilization at Homesites of 5 or less spigots Each additional spigot at homesite above 5 Campsites with sewer lines extended thereto 41.1 Campsites which utilize dump station Ski Slope Swimming Pool up to 10,000 gallons capacity Swimming Pool over 10,000 gallons capacity Each Spigot other then Homesite or Campsite Dump Station
Pursuant to the terms ofthe sales agreement utilized in connection with the sale of homesite lots within the Company's service territory, and pursuant to beneficial restrictive covenants filed of record on the Company's service territory, homesite lot owners are obligated to pay a charge when sewer lines are extended to their homesite lots and upon which no structure has been erected. Such charge, as established hereby, is $24.00 per lot per quarter and shall be paid irrespective ofthe fact that sewage is not discharged.
Terms of Payment
Charges will be billed and payable quarterly, or monthly (C) at the option ofthe customer,
(I) Indicates Increase (C) Indicates Change
Per Quarter $62.70
8.64 D
16.59 486.23
66.76 332.80
17.41 272.03
P (
13.93
er Month $20.90 V
2.88
5.53 162.07 22.25
110.93 5,80
90.68
Issued: May 23, 1997 Effective: June 1, 1997 Supplement No. 6 to
Sewer-Pa. P.U.C. No. 1
Atlachmem lo Reso 374?
SCHEDULE OF RATES AND CHARGES
Rates for Sewer Service (Treatment)
There is hereby imposed upon each property served by Johnstown Regional Sewage (JRS) and having the use thereof, a quarterly sewer rent or charge payable as hereinafter provided, for the use, whether direct or indirect, of JRS's system, based on the rates hereinafter set forth. All owners connected to JRS's system shall be billed according to the following schedule of sewer rates and the billing practice of JRS, by determining the total number of billing units for which such owners are responsible, and the following charges shall be imposed for each such billing unit:
QUARTERLY SEWER RAXES, TO BE BILLED MONTHLY
( SEWAGE VOLUME
0 - 6,000 ga iFons '73~" 6,000-40,000 gallons
40,000- 100,000 gallons
;.100,000- 200,000 galions
b00,000^3"0d7000ia7fons"
$21.74 M i n i m u m / ^
RATES
$3.62 per 1,000 gallons
AIL OVER -300,000 •gallons
$2.04 per 1,000 gallons
'i$ 1,23"per 1,000 gallons'
toWpe lT^OO'ga i ions
$0.76 per 1,000 gallons
Sewage for properties not served by a metered public water connection shall receive an average bill. JRS reserves the right to have a meter installed and read to compute actual water consumed.
ADDITIONAL CHARGES AND FEES
Accounting and Clerical Fees
Returned Check Fee $35.00
Inquiry Fee (Lien Status) $15.00 Inquiries made to and check payable to JRS as administrative subcontractor.
SHUT OFF FEES (based upon agreements with local water suppliers):
Greater Johnstown Water Authority $25.00
Southwest Central Water Authority $50,00
Jackson Township Water Authority $50.00
East Taylor Township Water Authority $50.00
Highland Sewer and Water Authority $25.00
includes both turn-off and turn-on
includes both turn-off and turn-on
includes both turn-off and turn-on
includes both turn-off and turn-on
includes both turn-off and turn-on
Liule Washington Wastewater Company
'inccrest Division
SUPPLl-MKNTNO. 70 lo
SEW1-R-PA.P.U.C.NO. I SIXTH REVISED PAGI: NO. -I
CANCELING FIFTH Rl-VISliD PAGE Nt). 4
SCHEDULE QF KATES
Meter Service (I)
Minimum Charge - for all metered customers.
Customer Charge Quarterly Monthly
$ 125.85 /'S 41.95 \
Pinecrest Unmetered Kates: ,
Residential-Inside Pinecrest Development $41.95 per month per equivalenl dwelling unit
/ Residenlial-Ouiside Pinecrest Devclopmenl $50.00 per month per equivalenl dwelling unil.
Pinecresl Commercial Aareemcnls: Commercial- 'Fhe Pinecresl commercial contracts have not been increased in this rate 11 ling because they are nol tariff customers. The Company will negotiate escalations to the cuninicls separately when warranted.
{]) Imiicatcs Increase
ISSUED: December 29. 2008 -4- EEFECTIVE: July 23, 2009
SUPPLEMENT NO. 53 lo
Liule Washington Wastewater Company SEWER-PA.P.U.C.NO. 1 FOURTH REVISED PAGE NO, 4A
Will islown Woods Division CANCELING THIRD REVISED . P A G E j j a 4A
SCHEDULE QE RATES
iv[eter_Servicie
Customer Charge - for ail metered cusiomers for which no minimum ailowancc is given. (I)
Customer Charge Quarterly Bi-Monthly Monthly
$ 126.00 $84.00 $42,00
Consumption Charges: (I)
Wastewater wi l ! be charged for at the following rates:
For water used ( $2.40/ 1,000 gallons
Multiple Apartment Bil l ing ("Willistown Woods Area Only): {I) For apartments thai have multiple units and are metered through a master meter, the customer charge shall be calculated by multiplying ihe cuslomer charge shown above by the number of dwelling units in the apartment being metered. There is no minimum ailuwance in this division. Therefore, all consumption shall be charged at the $2.40 per thousand gallon rate.
(I) Indicates Increase
ISSUED: July 31 , 2008 .4A- EFFECTIVE: August 1,20()K
Lil l le Washington Wastewater Company
jnks at Gettysburg Division
SUPPLEMENT NO. 67 to
SEWER-PA.P.U.C.NO, I SIXTH REVISED PAGE NO. 5
CANCELING FIFTH REVISED PAGE NO. 5
SCHEDULE OF KATES
Meter Service
Cuslomer Charge - for all metered cusiomers for which no minimum allowance is given.
(1)
Kcsicfeinial
Co in me rein I
Cuslomer Charge Ouarteriy Monthly
y
$132.00 $44.00
$252.00 $84,00
Consumption Charges:
Waste Water wil l be charged for at the fbllowing rates:
For all walcr used { $6.13?/ 1,000 gallons
(I) Indicates Increase
ISSUED: December 29, 2008 -5- EITECTIVE: Augusl 6,2009
Jtlic Washington Wastewater Company
East Bradford Division
SUPPLEMENT NO. 7! to
SEWER-PA.P.U.C.NO. I FIFTH REVISED PAGE NO. 6
CANCELING FOURTH REVISED PAGE NO. 6
Cuslomer Charge - for all metered cusiomers.
SCHEDULE OP RATES
Meier Service
Cuslomer Charge
Monthly $ 60,00 •-
0)
Consumption Charges:
Waste Walcr will be charged for at the following rates:
For all water used $7.66^ 1,000 gallons (1)
(I) iruiicates Increase
ISSUED: December 29. 2009 -6- FTECTIVI:: July 23, 2009
Lillle Washington Wastewater Company
Twin Hills Division
Cuslomer Charge - for all metered cusiomers.
SEWER-PA.P.U.C.NO, I 10
SECOND REVISED PAGE NO. 7 CANCELING FIRST REVISED PAGE NO, 7
SCHEDULE OF RATES
Meter Service
(I)
Minimum Charge Quarterly Monthlv
$ 141.00 $47,OO1'
Consumption Charges: (I)
Wastewater will be charged for at the following rales:
For all waler used $1.76/ 1,000 gallons
v — •
ISSUED; November 29, 2007 -7- Em-CTIVE: November 30, 2007
Link- Washington Waslewaicr Company
Plumsock Division
Cuslomer Charge - for all mclercd cusiomers.
SUPPLEMENT NO, 20 to
SEWER-PA.P.U.C.NO, I THIRD REVISED PAGE NO, 8
CANCELING FIRST AND SECOND REVISED PAGE NO. 8
SCHEDULE OF RATES
Meter- Service
Customer Charge Monthly
% 60.00 y
(0
Consumption Charges:
Waslewater wil) be charged for ai ihe following rates:
For all waler used S7.91 / 1,000 gallons (1)
(I) IiulitiUes Increase
ISSUED; June 23, 2005 -8- EFFECTIVE; June 24, 2005
Lillle Washington Wastewater Company
Media Division
Cuslomer Charge - for all metered cusiomers.
SUPPLEMENT NO. 43 lo
SEWER-PA.P.U.C.NO. 1 SECOND REVISED PAGE NO. 9
CANCELING FIRST REVISED PAGE NO. 9
SCHEDULE QF RATES
Meier Service
Cuslomer Charge Si/.e
5/8-3/4" 1" 1 '/T 2" 3" 4" 6"
Ouarteriy
$ 15.21 21.60 38,46 86,82
154.02 346,80 616.05
1385,64 2463.30
Monihlv
$5.07 •'• 7.20 ••-'
12.82 •*" 28.94 -•••'
51.34 •"'
115.60 '-•
205.35 -•'
461.88 •••-821.10.,..--
(I)
Consumption Charges:
Wastewater will be charged for at the following rates:
For water used in excess ofthe minimum allowance ••'' y
S3.20/ 1,000 gallons
(I) liulicales Increase
ISSUED: June 32, 2007 -9- EFFECTIVE: June 23, 2007
SUPPLEMENT No. 59 lo
Lillle Washingion Waslewater Company SEWER-PA.P.U.C.NO. f SECOND REVISED PAGE NO, I0A
Bridlewood Division CANCELING FIRST REVISED PAGE NO. IQA
SCHEDULE OK RATES
Metered Rate Service (C)(1)
Residemial Customers:
Customer Charge-Single Family Homes $36.00 per month
Customer Charge-Townhomes $31.00 per monlh
Commercial Cusiomers:
Customer Charge-Apartment Complex $8,344.00 per month
Customer Charge-Childrens World Daycare $262.00 per month
Consumption Charge:Residential customers $ 1.52 per thousand gallons
(C) Indicates Change (1) Indicates increase
ISSUED: December 29, 2008 -10A- EFFECTIVE: August 6, 2009
Liule Washington Wastewater Company
White I Liven Division
Kesidential Customers:
Cuslomer Charge
Consuinpiion Cliarge
Unmelered Residential
SUPPLEMENT No. 70 to
SEWER-PA.P.U.C.NO. 1 SECOND REVISED PAGE NO. 10
CANCELING FIRST REVISED PAGE NO. 10
SCHEDULE OF RAITS While Haven Borough Metered Service (C)(1)
$41.35 per month per EDU
$ 1,20 per thousand gallons
y $41.35 per monlh per EDU
Commcreial Customers:
Class A Charge
Class 13 Charge
Class C Charge
Class D Charge
Unmelered Commercial
Consumption Charge (Class D charge only)
$62.50 per month per unit
$37.50 per monlh per unit
$25 per month per unil
$41.35 per month per unit
$41,35 per monlh per unil
$ 1,20 per thousand gallons
Kidder Township
Dennison Township
East Side Borough
Penn [.Like Park Borough
Foster Township
Kidder Township Metered Service
$750.00 per year per EDU (O&M & debl service)
Municipal Service Contracts $240.00 per year per EDU (O&M fee only)
(I)
$352.00 per year per LDU (O&M fee & debl service)
$240.00 per year per EDU (O&M tee only)
$348.00 per year per EDU (O&M fee only)
Please note dial the municipal service contracts will be negotiated separately with ihe municipalities at the appropriate time.
(C ) Indicates Change (1) Indicates Increase
ISSUED: December 29, 2008 -10- EFFECTIVE: Juty 23, 2009
Little Washington Waslewaicr Company
Eagle Rock Division
All Kesidential metered cusiomers.
Step 1 •, Residemial
Consumption Charge
Step 2; Residemial
Consumption Charge
Commercial metered Cusiomers,
SCHEDULE OF RATES
Mclercd Service
Cuslomer Charge Monthlv
$32'.'25 per month per EDU
$1.20 per ihousand gallons
$35.50 per monlh per EDU
$ L20 per ihousand gallons
Step
S(ep 2:
Eagle Rock Inn
Eagle Rock Lodge
Eagle Rock Clubhouse
Other Commercial
Consumption Charge
Eagle Rock Inn
Eagle Rock Lodge
Eagle Rock Clubhouse
Olher Commercial
Consumption Charge
Cuslomer Charge Monthly
$516 per month
$161.25 per month
$129 per monlh
$32,25 per monlh per EDU
$1.20 per ihousand gallons
S568 per month
$177.50 per month
$!42 per month
$35.50 per month per EDU
$ 1.20 per ihousand gallons
SUPPLEMENT NO. 72 lo
SEWER-PA.P.U.C.NO. I SECOND REVISED PAGE NO. I OB
CANCELING FIRST REVISED PAGE NO, 10B
(C)(1)
(1) liulicales increase
ISSUED: December 29, 2008 - J 0 B - EFFECT/VE: September 25, 2009
Lillle Washington Waslewater Company
"fhornhursl Division
Residemial & Non-Residential Cusiomers:
SCHEDULt:-: OF RATES
Mclercd Service (C )(1)
SUPPLEMENT NO. 70 lo
SEWER-PA.P.U.C.NO. 1 SECOND REVISED PAGE NO. IOC
CANCELING FIRST REVISED PAGE NO. IOC
Slep 1 Customer Charge
Consumption Charge
$36.00 per month per EDU
$.60 per thousand gallons
Slop 2: Customer Charge
Consumption Charge
$46.75 per month per EOU
SI .20 per thousand gallons
Clubhouse or other building Based on peak flow usage converted to an EDU basis
Unmetered Service
Lot with no building Residemial
/ $20.00 per quarter $36.00 per monlh
Note: In the event lhat two or more contiguous lots are merged in a deed into one lot under common ownership, the property owner shall be charged for one lot charge if the lol is vacant, or for no lot charge if a house has been esiablished as a regular cuslomer on the lot.
(C ) Imiicatcs Change (I) Indicates Increase
ISSUED: December 29. 2008 -IOC- EFFECTIVE; July 23, 2009
Lillie Washington Waslewater Company
Rivercrest Division
SUPPLEMENT NO. 49 SEWER-PA.P.U.C.NO. 1
SECOND REVISED PAGE NO. 101) CANCELING FIRST REVISED PAGE NO. IOD
SCHEDULE OF RATES
Meier Service
Cuslomer Charge - for ali metered cusiomers. (I)
Minimum Charge Quarterly Mpmhjv
$ 81.00 $27.00
Consumption Charges:
Wastewater wiil be charged for at the following rales:
For ali water used
(0
$5.02/ 1,000 gallons
ISSUED: November 29, 2007 -I0D- EFFECTIVE: November 30, 2007
Uti le Washington Wastewater Company
Lillle Washingion Division
SUPPLEMENT NO. 54 to
SEWER-PA.P.U.C.NO, i FIFTH REVISED PAGE NO. I0E
CANCELING FOURTH REVISED PAGE, NO, 10E
SCHEDULE OF RATES
Meier Service
Minimum Charge - for all Residential metered customers.
Cuslomer Charge Monthlv
Residential $67.00 /
(")
Consumption Charges:
Wastewater w i l ! be charged for ai the following rales;
For all water used $5,15/ 1.000 gallons (0
Conlract with East Brandywine Township Water & Sewer Authority (EBTWSA)
"The EBTWSA owns its collection system and bills its customers independently. Suburban Wastewater Company bills EBTWSA foe Ihe use o f ils wastewater ireatmenl plan! al ihe following rate; S5.49 per thousand gallons
{!) Indicates Increase
ISSUED: July 3 I, 2008 -10E- Effeciive: August 1.2008
Suburban Waslewaicr Company
.aure! Lakes Division
SUPPLEMENT NO. 70 io
SEWER-PA.P.U.C.NO. I SECOND REVISED PAGE NO. I0F
CANCELING FIRST REVISED PAGE NCI I OF
Ali Kesidenlia! metered cusiomers.
Slop I:
Step 2:
Residential
SCHEDULE OF RATES
Metered Service
Cuslomer Charge Monthly
/ $36,00 per EDU
( C ) ( i )
Consuinpiion Charge $.60 per thousand gallons /
Residential $44.00 per EDU . /
Consumption Charge $ 1,20 per thousand gallons
Note; The number of equivalenl dwelling units (EDUs) lo be billed for Non-Residential connections is deiermined by dividing the peak daily usage, based on measurements or reasonable estimates, by 230 gallons.
(C ) Indicates Change (I) Indicates Increase
ISSUED: December 29, 2008 -I0F- ITFECT1VE: July 23, 2009
Lillle Washingion Wastewater Company
Deerfield Knoll Division
SUPPLEMENT NO 68 lo
SEWER-PA.P.U.C.NO. I SECOND REVISED PAGE NO, 10G
CANCELING FIRST REVISED PAGE NO. I0G
SCHEDULE OF RATES
Metered Service
Metered Rate Charge - for all Residemial metered customers
(1)
Customer Charge:
Residential
Monthly /
$45,00
Consuinpiion Charge:
(I) Indicates increase
/ Foe all consumption $3.37 per ihousand gallons
ISSUED: December 29. 2008 -10G- EFFECTIVE: August 6,2009
Jtlic Washington Wastewater Company
CS Sewer Division
Residential Service:
Flal Rate
SCHEDULE OF RATES
Unmetered Serv ice
y $20.66 per month
SUPPLEMENT NO. 25 to
SEWER-PA.P.U.C.NO. I
ORIGINAL PAGE NO. 1011
Residential Availability Service:
Flat Rate $6.00 per month
Apanmcni Service:
Flal rale per equivalent dwelling unil $20.66 per momh as specified by the Department of Environmental Protection al 25 PA Code Section 73.17
Commercial Service: Flat rate per equivalent dwelling unit $20.66 per momh as specified by the Department of Environmental Protection at 25 PA Code Section 73.17
ISSUED: January 21, 2006 -iOH- EFFECT1VE: January 21, 2006
Liule Washingion Wastewater Company SUPPLEMENT NO. 52 to
SEWER-PA.P.U.C.NO, ! SECOND REVISED PAGE NO, 101
Peddlers View Division CANCELING FIRST REVISED PAGE NO, 101
- SCHEDULE OF RATES
Meter Service
Cuslomer Charge - for all metered customers for which no minimum allowance is given. (I)
Cuslomer Charge Quarterly Bi-Monthly .Monthly
y $147.00 $98.00 $49.00
Consumpiion Charges:
Waste Water will be charged for al the following rales: y
For all walcr used $4.75 / 1,000 gallons (1)
(I) Indicates Increase
ISSUED: July 31, 2008 -101- EFFECTIVE: August 1.2008
Utile Washington Wastewater Company
'The Greens at Penn Oaks Division
SEWER-PA.P.U.C.NO. I
ORIGINAL PAGi: NO. (OJ
SCHEDULE OF KATES
Meter Service
Cuslomer Charge - for ail metered customers.
Minimum .Charge Quarterly Monthly
Per EDU $ 270.00 $ 90.00 y
Consumption Charges:
Wastewater will be charged for ai the following rates;
For all water used /
$1.50/ 1,000 gallons
Noie that all Rcsid.ential customers will be charged the customer charge based on one (I) EDU. When the service io the clubhouse is made, billing for ihe clubhouse will be based on five (5) EDUs. There are no other non-Residential cusiomers served in this rale division. Should there be occasion in the future to serve other non-Rcsidcnlia! customers, an equivalenl EDU factor will be required to be deiermined.
ISSUED: June 30, 2007 - I0J- EFFECT1VE: June 30, 2007
Little Washington Waslewaicr Company
Newlin Green Division
SUPPLEMENT NO. 51 SEWER-PA.P.U.C.NO. I
CANCELING FIRST REV1SEDPAGE NO_ I OK
SCHEDULE OF RATES
Meter Service
Customer Charge - for all metered customers.
'vr EDU
Minimum Charge Quarterly Monthly
y $ 270,00 S 90.00
Consumpiion Charges:
Wastewater will be charged for al Ihe following rales:
For all waier used $1.50/ 1.000 galions
Note that all Residential cusiomers will be charged the cuslomer charge based on one ( I) EDU. 'There are no non-Kesidentiai customers served in Ihis raie division ai ihe present time. Should there be occasion in ihe future lo serve other non-Residcmial cusiomers, an equivalenl EDU factor will be required lo be deiermined.
ISSUED: Augusl 9, 2007 -!0K- EFFECT1VE; Augusl 9, 2007
Lidle Washington Wastewalec Company
Woodloch Springs Division
SUPPLEMENT NO. 70 SEWER-PA.P.U.C.NO. 1
FIRST REV1SED.PAGE NO, 10! CANCELING ORIGINAL PAGE NO, I0L
All Residential metered cusiomers.
Residential
Consumpiion Charge
Unmelered Kesidential
SCHEDULE OF RATES
Metered Service
Customer Charge
Monthly
/ $47.00 per month per EDU
^2 $ 1.20 per ihousand gallons
y $47,00 per momh per EDU
(C)(1)
Commcrciiil;
Woodloch Springs Clubhouse Facilities $282.21 per monlh
Olher Commercial Charge $47.00 per month per EDU
Unmetered Kesidential $47.00 per monlh per EDU
Consumpiion Charge $ 1,20 per Ihousand gallons
Note; 'The number of equivalent dwelling units (EDUs) lo be billed for Non-Residential connections is deiermined by dividing Ihe peak daily usage, based on measurements or reasonable estimates, by 230 galions.
(C ) IruJicales Change (1) Indicates Increase
ISSUED: December 29, 2008 - iOL- EFFECTIVE: July 23, 2009
Supplement Mo. 1 io
LOREN K. DIXON SEWER WORKS Sewer-Pa. P.U.C. No. 1 Firs! Revised Page No. 11
Cancelling Original Page No. ] 1
RATES
Rule 12. The charge to each cuslomer shall be aflat rate of Fiftee^ (S15.00)^)ollars per month. (!)
No customer's sewer service will be shut off for non-payment of bills or violation of any rules without the company's first complying with the shut-off procedure prescribed by Public Utility Commission rules and regulations.
(J) Indicates increase
ISSUED: May 1, 1990 EFFECTIVE: July 1. 1990
Supplement No. 11 To Tariff Sewer - Pa. P.U.C. No. 1
Fifth Revised page No. 3 Canceling Fourth Revised page No. 3
MANWALAMINK SEWER COMPANY
SCHEDULE OF RATES
• Fiat Rates
Non Metered Rates
Customer Category
1. Residential Users
2, Commercial Users (a) Small Commercial Users
(b) Large Commercial Users 1. Ridgetop Recreational Area Pool 2. River Village Recreational Area Pool 3. Sun Mountain Recreational Area Pool 4. Shawnee Mountain Ski Area
Monthly Rates
$ , 26,50 ''
$ 35,30
73.50 73.50 73.50
252.00
Application
This schedule is available to ali customers.
Terms of Payment:
Bills for sewer service shall be due and payable monthly.
issued: July 10, 2000 Effective: October 1, 2000
Supplement No. 11 To Tariff Sewer - Pa. P.U.C. No. 1
Original Page No. 3A
MANWALAMINK SEWER COMPANY
SCHEDULE OF RATES (continued)
Metered Rates (C)
Service Charge: / $10.00 Charge Per Month A
Volume Charge: In addition to a monthly service charge presented above, a volume charge based on metered water usage will be charged as follows;
Rate Per 1,000 Gallons
Forthe First 10,000 gallons per month $3.98 ^
For Afl Over 10,000 gallons per month $1.34 t--
Multiple Unit Billing: In cases where service is provided to several customers through a single meter, the bill is computed as follows:
Service Charge: Based on the actual number of units served through such meter
Plus; Volume charge computed by dividing the metered volume by the number of units. The dollar amount for a unit is calculated on the above rates and multiplied by the number of units.
Terms of Payment: Bill for sewer service shall be due and payable monthly.
(C) Indicates Change
Issued: July 10. 2QQ0 Effective: October 1, 2000
CRAIG E. DALLMEYER t/a SEWAGE - Pa. P.U.C. No. 1 REGENT ACRES MOBILE HQt4£ PARK Original Page Ho. 3
SCHEDULE OF FLAT RATES
This Schedule is available to all Domestic and
Commercial Customers. All Customers served—tfqlier this Schedule
shall be subject to a mormhly charge ov S30.75,) There are no
industrial customers served by the Company.
Issued:October 30, 1 9 8 5 E f f e c t i v e : February 1, 1986
REYNOLDS DISPOSAL COMPANY
Supplement No. 35 To Sewage-Pa. P.U.C. No. 3 Twelfth Revised Page No. 9 Canceling Eleventh Revised Page 9
SCHEDULE OF FLAT RATES fl)
Domestic and Commercial Service
Domestic Service
The following flat rate for domestic service shall apply lo single family dwellings having their own unmelered water supply. Should a second facility (apartment, mobile home, etc.) be added to an existing service, same shall be billed as an individual domestic unit.
Net, Domestic Service P&Mpuarter
Each Domestic Unit A
Commercial Service
(0
The quarterly rate for Commercial Service customers having their own source of unmetered water shall be as follows:
Basic commercial cuslomer wilh no more than two (2) individual (men and women) rest rooms, one (1) floor drain, one (1) supply sink, one (1) utility sink and one (1) drinking fountain shall be classed as single commercial.
Each additional connection (stack tap or floor drain) shall be added al the rate indicated below.
Known heavy users, such as laundromats, car washes, or olher water-intensive customers shall be billed at the same rates as metered customers with such quantities estimated on a monthly basis by a representative of Reynolds Disposal Company.
If such estimates are questioned by the customer, it shall be the responsibility ofthe customer to furnish metering devices wilh prior approval of such device by the Company.
Commercial Sendee
Each Commercial Unil
Per Quarter
$82.70 (I)
(I) Indicates Increase
Issued: January 23, 1998 Effective: January 28, 1998
School House Village, Tariff Wastewater - Pa. P.U.C. No. 1 Wastewater Division Original Page Mo. 8
8) Wastewater Service Charge per EDU: For EDU's actually allocated to and used by an improved property to discharge domestic sanitary wastewater during any portion of any billing period the annual wastewater service charge per EDU shall consist of a fixed charge of fifteen dollars ($15.00) and an operating and maintenance charge of thirty dollars ($30.00), for a total wastewater service charge of forty five dollars
\ /{$45.00Mcta |^ / t f tVj
5. Wastewater Service Charge bv Owner of Multiple Use Improved Property: In the case of multiple use improved property sharing a common connection to the wastewater system or a common structure, each such classification of improved property shall pay a separate wastewater service charge, as though it were housed in a separate structure and had a direct and separate connection to the wastewater system, computed in accordance with the provisions of this Part I, Section A, Sub-Section 4, a), 1).
6. Owner and/or Customer to Provide Information to Companv:
a) The owner of any improved property and/or customer discharging wastewater into the wastewater system shall furnish to the Company all information deemed essential or appj-opriate by the Company for the detennination of all applicable wastewater service charges and surcharges. The costs of obtaining such information shall be borne by such owner of the improved property and/or customer. The Company reserves the right to review the disposition of cuslomer wastewaters at any time service is in force.
b) In the event ofthe failure ofthe owner and/or customer to provide adequate infonnation, the Company shall estimate the appiicable wastewater service charge and surcharge based upon available information or until such time as adequate infonnation is received. There shall be no rebate of past payment if the owner and/or customer refusal to provide such information results in overpayment.
Issued: July 10, 2007 Effective: July 15, 2007
BACK BOROUGH OF SCHUYLKILL HAVEN SCHUYLKILL COUNTY. PENNSYLVANIA
ORDINANCE NO. 1120
AN ORDINANCE AMENDING ORDINANCE NO. 1012 SETTING FORTH AND REDUCING SEWER CHARGES FOR ALL CUSTOMERS OF THE PUBLIC SEWER COLLECTION, CONVEYANCE, AND TREATMENT SYSTEM.
BE JT ENACTED and ORDAINED by the Council ofthe Borough of Schuylkill
Haven, Schuylkill County, Pennsylvania, and it is hereby enacted and ordained by the
aulhority ofthe same as follows:
SECTION 1. Section 8(a), entitled Computation of Sewer Rentals or Charges, the fourth paragraph shali be amended to read as follows:
(a) Metered Services...
In either ofthe foregoing cases, such sewer rentals or charges shall be computed in accordance wilh the following metered rate schedules; subject, however, to the minimum sewer rentals or charges provided in this Ordinance:
Metered Rale Schedule
Water Consumption Monthly Sewer Rates
Gallons as charged- y Schuylkill Haven Borough Residents $6.6542/1,000 gallons
Gallons as charged-Schuylkill Haven Borough Large Commercial & Industrial Users (water consumption in excess of 250,000 gal./mo.) $5.9404/1,000 gallons
Gallons as charged-North Manheim Sewer Authority $6.6542/1.000 gallons
The above shown Sewer Rate shall become effective commencing January 1, 2005,
I '
Pennsylvania Utility Company Supplement No. A to Tariff Wastewater - Pa. P.U.C, No, 1
Second Revised Page No, 3
PART I: SCHEDULE OF RA TES AND CHARGES
Section A - Rates for Service; Phase I (0
Residenttal {Metered Rate):
Customer Charge $ n ... y / , Eagle Village (Quarterly) $56.83/3 - ' ^ ' m o ' ' ^ M l -Eagle Village - Office (Quarterly) $56.83 -;
The Glen at Tamiment (Quarterly) $56.83 Eagle Point (Quarterly) $56,83
Consumption Charqe
/
Al! Consumption $10.62 per thousand gallons
Availability Charge for Unoccupied Lots $20.66 per quarter
Commercial (Metered Rate):
Customer Charge (Monthly) $126.30
Consumption Charge $10,62 per thousand galions
Issued: Juty 16, 2010 Effective: July 17, 2010
Wonderview Sanitary Facilities Sewer- Pa. P.U.C. No.3
Original Page No.4
Schedule of Rates
Application:
This schedule•applies to ail service throughout the entire territory served.
Rates For Sewerage Service:
Sewerage service rate is a flat rate per service for both residential and commercial customers.
Commercial customers is service territory are multi-unit residential hut^T^ings/.
The rate is IS35.65\ per month billed monthly.
Issued: April 22, 1993 Effective: April 23, 1993
PAWC Statement No. 8-R
BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION
REBUTTAL TESTIMONY OF JOHN J. SPANOS
ON BEHALF OF PENNSYLVANIA-AMERICAN WATER COMPANY
CONCERNING DEPRECIATION
DOCKET NO. R-2010-2166214 NORTHEAST WASTEWATER OPERATIONS
August 26, 2010
AUG 5
KBCaVED e ZOIO
"iBsassa---
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PENNSYLVANIA-AMERICAN WATER COMPANY (PAWC)
REBUTTAL TESTIMONY OF JOHN J. SPANOS
I. INTRODUCTION
Please state your name and business address.
My name is John J. Spanos. My business address is 207 Senate Avenue, Camp
Hill, Pennsylvania.
Have you previously submit ted testimony in this proceeding?
Yes. My pre-filed testimony was submitted in April 2010 and marked PAWC
Statement No. 8, My qualifications are set forth in that statement.
What is the purpose of your rebuttal test imony?
The purpose of this testimony is two-fold. First, I will explain a revision the
Company will make to its claim for recovery of net salvage. Second, I will
respond to the pre-filed direct testimony of the Office of Consumer Advocate's
(OCA) witness, Ralph C. Smith.
What is the subject of your rebuttal test imony?
The subject of my rebuttal testimony is depreciation expense and accumulated
depreciation including changes to the Company's depreciation claims the OCA's
witness has proposed.
II. Revision Of The Company's Claim For Net Salvage
How is the Company revising its claim for net salvage?
In developing the Company's claim for depreciation, I followed standard
Pennsylvania practice with respect to the net salvage amortization period.
Specifically, net salvage (positive salvage less cost of removal) associated with
the retirement and removal of wastewater treatment plant assets were amortized
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over five years. However, the Company has determined that based on the
specific facts and circumstances presented here it is willing to increase the
amortization period to ten years. Given the size and the nature of the assets that
were retired and the cost to remove the structures and other components of the
old treatment plant assets, the Company believes that an exception to the
Commission's standard procedure would be justified in this case.
III. The OCA Witness' Proposal
Please summarize OCA Witness Smith's depreciation proposal?
Mr. Smith proposes to use the remaining life accrual method for the net salvage
component instead of adhering to standard Pennsylvania practice of amortizing
net salvage.
Has Mr. Smith offered any support for deviating from standard depreciation
procedures employed in Pennsylvania?
No, he has not. It appears that his recommendations have been made as a
means of reducing depreciation expense and, therefore, revenue requirement by
shifting a larger portion of cost recover to later in the lives of existing assets.
Please discuss Mr. Smith's proposal to employ the remaining life method to
recover net salvage?
At the outset, it should be emphasized that in virtually all jurisdictions other than
Pennsylvania, net salvage is recovered prospectively.1 This means that in other
jurisdictions, there is an element of the annual accrual for depreciation that
Net salvage is the sum of positive salvage and cost of removal. Given the nature of utiiity property, net salvage for utilities is generally negative. In other words, cost of removal exceeds positive salvage. For that reason, I focus on the recovery of net negative salvage even though it may be possible that net salvage could be positive, in which case the amortization would flow positive salvage back to customers over the amortization period.
- 2 -
1 recovers the estimated cost to dismantle and remove plant over the period that
2 such plant is actually in service. That element of the annual accrual is booked to,
3 and increases, accrued depreciation. Thus, by the time the plant is retired, the
4 cost of removal (except for any variation between estimated and actual costs) will
5 have been recovered and appropriately recorded in accrued depreciation. In
6 contrast to procedures employed elsewhere, the Superior Court of Pennsyivania
7 in Penn Sheraton Hotel v. Pennsylvania Public Utilitv Commission. 198 Pa.
8 Super. 618, 184 A.2d 324 (1962) has held that prospective recovery of net
9 salvage is not permitted under Pennsylvania law and, instead, such costs, when
10 they have actually been incurred at the end of the service life of a property, must
11 be "capitalized and amortized":
12 If the utiiity retires and removes a property without replacing it or
13 replaces it after removal and incurs actual negative salvage in 14 doing so, the expenditure should be capitalized and amortized by 15 some reasonable method and for and over a reasonable length of 16 time. 17 18 The Commission has implemented the Superior Court's directive by having
19 utilities (1) deduct the amount of actual net salvage from accrued depreciation
20 when such net salvage is first incurred; (2) amortizing actual net salvage over
21 five years; and (3) each year, adding to accrued depreciation the annual amount
22 of the amortization. This procedure was explained in a 2004 decision for the
23 Company, where the Commission once again affirmed this procedure.
24 Pennsvlvania Public Utilitv Commission v. Pennsvlvania-American Water
25 Companv, 231 P.U.R.4th 277 (2004):
26 Additionally, the ALJ averred that PAWC's capitalizing net salvage 27 is directed by the most recent Uniform System of Accounts for 28 Class A Water Utilities prescribed by the National Association of
- 3 -
1 Regulatory Utility Commissioners (NARUC). The ALJ also noted 2 that PAWC is required, by Commission regulation, to keep its 3 accounts in conformity with this NARUC prescript. 52 Pa. Code § 4 65.16(a). The ALJ concluded that a Pennsylvania appellate court 5 and the Commission itself, repeatedly, have determined that 6 PAWC's treatment of net negative salvage is proper. Consequently, 7 the ALJ recommended that the OTS' proposed adjustment should 8 be rejected. (R.D. at 16) 9
10 No Party excepts to the ALJ's recommendation on this issue. 11 Finding the ALJ's recommendation to be reasonable, appropriate 12 and otherwise in accord with the record evidence, it is adopted. 13
14 Mr. Smith proposed employing the remaining life concept to recover the removal
15 costs of the old treatment plant over the (prospective) life of the new treatment
16 plant. This recovery method is a marked departure from Commission-approved
17 practice and raises a material issue of intergenerational equity as between
18 today's and future customers because, under Mr. Smith's proposal, a significant
19 portion for the cost of removal would not be recovered until even further in the
20 future than under current Commission practice.
21 Q. Please address Mr. Smith's contention that your study produces "double
22 recovery" of net salvage?
23 A. This ciaim is inaccurate and is based on Mr. Smith's misunderstanding of how
24 depreciation rates are developed in a future test year calculation. As shown on
25 Tables 1 and 2 of Exhibit 8-B, the future test year "bring-forward" of the book
26 reserve is calculated based on procedures consistently approved by this
27 Commission, which is clear from Pennsvlvania Public Utilitv Commission v.
28 Pennsvlvania-American Water Company. 231 P.U.R.4th 277 (2004). I used the
29 same procedure here. Mr. Smith's concern arises from the large cost of removal
30 incurred for the removal of the old treatment plant. However, the offset of this
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1 amount that occurs from amortizing the cost of removal (in the manner I
2 explained previously) does not begin until 2011. Thus, the combination of the
3 remaining life method, to recover the original cost of utility plant, and the
4 amortization of net salvage, to recover net salvage, that I have proposed will
5 recover the service value of the Company's property, neither more nor less.
6 Additionally, although the two components of cost recovery, capital
7 investment and net salvage, are set forth in one book reserve amount for each
8 account, the recoveries are booked individually.
9 IV. CONCLUSION
10 Q. Does this conclude your rebuttal testimony?
11 A. Yes, it does.
- 5 -
PAWC STATEMENT NO. 9-R
PENNSYLVANIA-AMERICAN WATER COMPANY NORTHEAST WASTEWATER DIVISION
DOCKET NO. R-2010-2166214
REBUTTAL TESTIMONY
OF
PAUL R. MOUL, MANAGING CONSULTANT P. MOUL & ASSOCIATES
CONCERNING
CAPITAL STRUCTURE RATIOS AND THE COST OF EQUITY
DATE: AUGUST 26, 2010
AUG 2 6 ?.m
PA PUBLIC UTILITY COMMISSION SECRETARY'S BUREAU
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REBUTTAL TESTIMONY OF
PAUL R. MOUL
Please state your name, occupation and business address.
My name is Paul R. Moul and I am Managing Consultant at the firm P. Moul &
Associates. My business address is 251 Hopkins Road, Haddonfield, NJ 08033-3062.
Mr. Moul, have you previously submitted direct testimony in this proceeding?
Yes. My direct testimony, pre-marked as PAWC Statement No. 9, was submitted on
April 30, 2010.
SCOPE OF TESTIMONY AND SUMMARY
What is the purpose of your rebuttal testimony?
Pennsylvania-American Water Company ("PAWC" or the "Company") has requested
that I respond to the testimony presented by Dr. J. Randall Woolridge, a witness
appearing on behalf of the Office of Consumer Advocate ("OCA"), and Mr. Andrew R.
O'Donnell, a witness appearing on behalf of the Office Trial Staff ("OTS"). My silence
on any particular matter discussed by Dr. Woolridge or Mr. O'Donnell regarding my
direct testimony should not be interpreted as my agreement with any of their
assertions.
Please identify the principal areas of controversy concerning the rate of return
issue in this proceeding.
Although I disagree with Dr. Woolridge on many points, my rebuttal testimony will
address two principal recommendations put forth by Dr. Woolridge. First, Dr.
Woolridge has proposed an inappropriate capital structure that includes short-term
debt, which is conceptually flawed and contrary to Commission practice for water
companies. Second, Dr. Woolridge has proposed an inadequate rate of return on the
1 Company's common equity, which does not come close to the level of return that
2 investors expect.
3 Mr. O'Donnell adopts much of the Company's proposed rate of return, including
4 capital structure and the embedded costs of long-term debt and preferred stock. He
5 also adopts the barometer group of water companies that I propose in this case. In
6 fact, the only element that Mr. O'Donnell disputes is the Company's proposed cost of
7 equity.
8 CAPITAL STRUCTURE RATIOS
9 Q. How do the Company's actual capital structure ratios differ from those
10 advocated by Dr. Woolridge?
11 A. The Company's proposed capital structure ratios were calculated using the Company's
12 actual capital structure for the future test-year ending December 31, 2010, computed
13 without short-term debt. Dr. Woolridge, in contrast, has recommended that the
14 Company's ratemaking capital structure include a short-term debt component.
15 Q. Dr. Woolridge notes that the Company has used short-term debt consistently in
16 the past three years. Does this justify the inclusion of short-term debt in
17 PAWC's capital structure in this proceeding?
18 A. No. While it is true that the Company has employed short-term debt historically, these
19 borrowings have been used primarily to finance construction-work-in-progress
20 ("CWIP"), to support plant in service until it is reflected in rates, and to acquire other
2i water companies. Indeed, the procedure used to calculate the Company's allowance
22 for funds used during construction ("AFUDC") rate attributes the borrowing cost for
23 short-term debt to CWIP. If the Commission were to adopt Dr. Woolridge's short-term
24 debt proposal, then a different method would be required to calculate the Company's
25 AFUDC rate. Moreover, even after a project is completed and no longer accrues
26 AFUDC, there is usually a lag between the time such plant is placed in service and
2
1 included in the Company's base rates. In the interim, the Company may continue to
2 finance the plant with short-term debt.
3 COST OF EQUITY
4 Q. What are the principal deficiencies in the cost of equity analyses presented by
5 Dr. Woolridge and Mr. O'Donnell?
6 A. Dr. Woolridge and Mr. O'Donnell have proposed considerably lower rates of return on
7 common equity than my analysis has indicated is necessary. The major differences
8 between our cost of equity findings involve; (i) the return level that will be acceptable to
9 the financial community, (ii) the selection of proxy group companies to measure the
10 cost of equity, (iii) the determination of a reasonable Discounted Cash Flow (DCF)
11 growth rate, (iv) whether a leverage adjustment to the DCF is necessary, (v) the extent
12 to which other methods of determining the cost of equity provide a reasonable measure
13 of the appropriate cost of common equity, and (vi) whether adjustments are necessary
14 to the Company's cost of equity due to its rate design proposal.
15 Q. How would the financial community react if the Commission were to accept
16 either Dr. Woolridge's or Mr. O'Donnell's equity cost rate proposals?
17 A. The financial community would be extremely concerned, if not shocked, if the
18 Commission set the Company's cost of equity at either 9% (Dr. Woolridge), or 9.5%
19 (Mr. O'Donnell). Either level of return is not sufficient to sustain utility operations or to
20 attract capital at a reasonable cost. In its July 31, 2008 Order at Docket No. R-
21 00072711, the Commission provided Aqua Pennsylvania, Inc. with an 11.00% return
22 on equity. Since then, and as described in my direct testimony, the financial markets
23 have experienced the worst financial crisis since the Great Depression. While capital
24 markets have stabilized, the volatility of the stock market continues to exceed that
25 which existed prior to the crisis, thereby indicating that the return for the Company
26 should not be lower.
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Are the 9% equity return proposed by Dr. Woolridge and the 9.5% figure
recommend by Mr. O'Donnell compatible with the current risk of common
stocks?
No. They are much too low. This is particularly true today given the wide swings in
share values and the overall financial market uncertainty that currently exists. The
behavior of the Chicago Board Options Exchange ("CBOE") Volatility Index (i.e., "VIX")
indicates that the risk of common stocks is relatively high at this time. The VIX is
based on real-time prices of options on the S&P 500 Index, and is designed to reflect
investors' consensus view of future (30-day) expected stock market volatility.
What has been the recent performance of the VIX?
It is well-established that greater volatility indicates higher risk, which, all else being
equal, translates into a higher cost of equity. As shown in the following table, the VIX
for the first half of 2010 has averaged 23.23, while the average VIX prior to the
financial crisis was less than 13.00.
Year VIX Month VIX
2005 2006 2007 2008 2009
12.81 January-10 20.77 12.81 February-10 22.54 17.54 March-10 17.77 32.69 April-10 17.42 31.48 May-10 31.93
June-10 29.92
Are there other objective indications ofthe level of returns expected by investors
which show that the opposing parties' proposed cost of equity is much too low?
Yes. According to the data provided by Dr. Woolridge, water utilities are forecast to
earn 11.8% as the average and 11.0% as the median (see page 5 of Exhibit JRW-10).
1 COMPARABLE COMPANIES
2 Q. Have proxy groups of companies been employed in this case to determine the
3 Company's cost of equity?
4 A. Yes. Mr. O'Donnell and I have used exactly the same companies in our respective
5 proxy groups. Dr. Woolridge also uses my barometer group companies but has
6 erroneously added Artesian Resources to his proxy group. Artesian Resources is not
7 in the Value Line publication. Also, Artesian Resources is the only company
8 considered by Dr. Woolridge that has two classes of common stock, one of which does
9 not have voting rights. This is a highly unusual situation for a water company.
10 Q. Dr. Woolridge also considers data for a group of natural gas distribution utilities
11 in his cost of equity analysis. Please comment.
12 A. The Commission disfavors the use of natural gas distribution company data as a basis
13 to determine the cost of equity for water utilities. Indeed, such a proposal was
14 specifically rejected in a rate proceeding involving Pennsylvania-American Water
15 Company (see Recommended Decision of Administrative Law Judge Wayne L.
16 Weismandel dated November 26, 2003 at Docket No. R-00038304). Moreover. Dr.
17 Woolridge has not compared the business risk characteristics of his natural gas group
18 companies to PAWC's wastewater operations. Notably in this regard, most of the
19 natural gas distribution companies considered by Dr. Woolridge have some form of
20 Revenue Decoupling Mechanism ("RDM"), which makes their recovery of fixed costs
21 very different than PAWC.
22 DCF DIVIDEND YIELD
23 Q. Do you have any comments regarding Dr. Woolridge's criticism of your dividend
24 yield calculation?
25 A. Yes. Dr. Woolridge complains that my dividend yield is overstated due to some
26 unexplained failure to properly annualize the quarterly dividend amount and the
5
1 compounding associated with the quarterly payment of dividends. But here, Dr.
2 Woolridge has created a straw-man. As shown on pages E-4, E-5, and E-6 of
3 Appendix E of Statement No. 9, my proposed 3.67% dividend yield derived from the
4 formula DQ/PO (1 +-5g), which is embraced by Dr. Woolridge (see page 29 of Dr.
5 Woolridge's direct testimony), produces virtually the same dividend yield (i.e., 3.68%)
6 that I derived using the other methods. As such, Dr. Woolridge's criticism is a "tempest
7 in a teapot" and should be ignored.
8 DCF GROWTH RATE
9 Q. As to the DCF growth component, what financial variables should be given
10 greatest weight when assessing investor expectations?
11 A. The theory of the DCF holds that (1) the value of a firm's equity (i.e., share price) will
12 grow at the same rate as earnings per share and (2) dividend growth will equal
13 earnings growth with a constant payout ratio. Therefore, to properly reflect investor
14 expectations within the limitations of the DCF model, earnings per share growth, which
15 is the basis for the capital gains yield and the source of dividend payments, must be
16 emphasized. The reason that earnings per share growth is the primary determinant of
17 investor expectations rests with the fact that the capital gains yield (i.e., price
18 appreciation) will track earnings growth with a constant price earnings multiple (another
19 key assumption of the DCF model). It is also important to recognize that analysts'
20 forecasts significantly influence investor growth expectations (see pages E-6 through
21 E-10 of Appendix E that accompanies my direct testimony). Lastly, it is instructive to
22 note that Professor Myron Gordon, the foremost proponent of the DCF model in public
23 utility rate cases, has established that the best measure of growth for use in the DCF
24 model is forecasts of earnings per share growth. For these reasons, earnings per
25 share forecasts must be given primary weight.
1 Q. Dr. Woolridge has questioned the reliability of analysts' forecasts of earnings
2 per share growth used in the DCF model. Do you agree?
3 A. No, I do not. Indeed, Dr. Woolridge uses analysts' forecasts extensively in his own
4 DCF analysis. Moreover, Dr. Woolridge says that it is necessary to adjust downward
5 the growth rate for his perceived bias in analysts' forecasts, but he makes no mention
6 of any upward adjustment to the dividend yield. If investors are placing reliance on an
7 analysts' forecast of growth, the prices of stocks will be overstated according to Dr.
8 Woolridge's reasoning. So if Dr. Woolridge is correct in his assessment that analysts'
9 growth forecasts are overstated, stock prices would have to be adjusted downward and
10 thus dividend yields adjusted upwards to accompany the downward adjustment that he
11 proposes for the growth rate. Failure to make both adjustments would result in a mis-
12 specified cost of equity.
13 Q. Do you agree with Dr. Woolridge's view that analysts' forecasts of earnings per
14 share contain some form of bias?
15 A. I find inadequate support for this assertion. With entry of the final judgment in the
16 Global Research Analyst Settlement ("GRAS"), which resolved the equity research
17 analysts practices at major investment banks that had been accused of conflicts of
18 interest, Wall Street firms have separated their research and investment banking
19 services. However, thirteen (13) of the studies that Dr. Woolridge lists under the
20 category "Ex Ante Model (Puzzle Research)" on page 5 of Exhibit JRW-11 pre-date
21 2003. Hence, the criticisms offered by Dr. Woolridge are out-of-date. I also find Dr.
22 Woolridge's criticism of analysts' forecasts somewhat perplexing because he provides
23 extensive evidence of analysts' forecasts (see pages 5 and 6 of Exhibit JRW-10) in his
24 DCF analysis. More importantly, it matters not what Dr. Woolridge may think about the
25 analysts' forecasts. Rather, what is important is what investors actually use in their
26 decisions regarding the purchase, sale or holding of stocks. The bottom line is that the
7
1 growth rate must be synchronized with the price that investors establish when valuing a
2 stock.
3 Q. Is there any reason to believe that analysts' forecasts may understate actual
4 earnings growth?
5 A. Yes. In an article entitled "Wall Street's Missed Expectations," dated April 26, 2010,
6 The Wall Street Journal reported that 64% of companies have beaten the analysts'
7 forecasts since the start of 1999. This means that over the past decade analysts were
8 actually too conservative in their forecasts.
9 Q. Dr. Woolridge also appears to have considered, and perhaps to have given some
10 weight to, historical growth rates in earnings, dividends, and book value. Please
11 comment.
12 A. History cannot be ignored. However, in developing a forecast of future earnings
13 growth, an analyst would first apprise himself/herself of the historical performance of a
14 company. Hence, there is no need to count historical growth rates a second time,
15 because historical performance is already reflected in analysts' forecasts which reflect
16 an assessment of how the future will diverge from the past.
17 Q. Did Dr. Woolridge also consider retention growth?
18 A. Yes. However, the retention growth formula was misapplied on page 5 of his Exhibit
19 JRW-10. In particular, Dr. Woolridge relied upon the Value Line forecasts of year-end,
20 rather than annua/ average, book values to calculate his return on book value. This
21 creates a downward bias in the results because, assuming some retention growth, the
22 average book value for the year will be less than the year-end book value. In fact,
23 when the FERC employs these data, it adjusts the year-end returns to derive the
24 average yearly return. Generally speaking, this adjustment would increase the
25 retention growth rate.
8
1 Q. Has Dr. Woolridge included external financing growth in his growth rate
2 analyses?
3 A. No. This omission results in a further downward bias. Forecasts by Value Line
4 indicate that future growth from external stock financing will add to the growth in equity,
5 which, if recognized, would result in a higher internal/external growth rate.
6 Q. As part of his DCF analysis, Dr. Woolridge used dividends per share growth
7 rates published by Value Line. Are these growth rates useful in the DCF?
8 A. No. The Value Line forecast growth rates in dividends per share shown on page 5 of
9 Exhibit JRW-10 are the lowest of ali growth rate indicators (earnings per share, book
10 value per share, and earnings retention from Value Line, Yahoo First Call, Zacks, and
11 Reuters - when corrected for negative growth rates). As I explain in my direct
12 testimony, under the constant growth assumption of the DCF model, dividends per
13 share are presumed to grow in the long-run at the same rate as earnings per share
14 with a constant dividend payout ratio, and stock price is presumed to grow in the long-
15 run at the same rate as earnings per share with a constant price-earnings multiple.
16 Hence, earnings per share growth is the correct growth rate to be used in the DCF
17 model.
18 Q. Dr. Woolridge also provides forecasts of book value per share growth. Please
19 comment.
20 A. Book value per share growth, as shown on pages 4 and 5 of Exhibit JRW-10, should
21 not be used in DCF analyses because stocks do not trade at constant market-to-book
22 ratios.
23 Q. Do you believe that the growth rates in dividends per share and book value per
24 share, as reported by Dr. Woolridge, are reasonable for DCF purposes?
25 A. No. The average analyst's forecast of earnings growth for Dr. Woolridge's water proxy
26 group is 5.58%, while the average of the dividend and book value growth rates is just
9
1 3.45% (3.2% + 3.7% = 6.9% + 2). For his gas group, the forecasted earnings growth
2 of 4.6% exceeds the 3.50% (4.0% + 3.0% = 7.0% + 2) average of the dividends and
3 book value growth. This clearly shows that the dividends and book values play no
4 useful role in the DCF analysis.
5 Q. Should the forecast negative growth rates for Middlesex Water and SJW
6 Corporation, as reported by Dr. Woolridge using the Reuters source, be
7 considered?
8 A. No. Negative growth rates provide no reliable guide to gauge investor expected growth
9 for the future. Investor expectations encompass long-term positive growth rates and,
10 as such, could not be represented by sustainable negative rates of change. Therefore,
11 statistics that include negative growth rates should not be given any weight when
12 formulating a composite growth rate expectation. Although investors have knowledge
13 that negative growth and losses can occur, their expectations are for positive growth --
14 otherwise they would hold cash rather than invest with the expectation of a loss. After
15 removing the negative growth rates, the Reuters average growth rate forecast is 6.4%,
16 which provides an overall group average growth rate of 6.4% (7.8% + 5.1% + 6.4% =
17 19.3% + 3). I should note that there is also a conflict in the Zacks growth rate reported
18 by Dr. Woolridge. On page 6 of Exhibit JRW-10, Dr. Woolridge reports a 4% Zacks
19 growth rate for California Water Service Group; Mr. O'Donnell, on the other hand,
20 shows a higher 6% growth rate for California Water Service Group.
21 Q. How would the use ofthese data impact the DCF employed by Dr. Woolridge?
22 A. The DCF result using the six-month average dividend yield, the 6.4% growth rate
23 developed above, and the leverage adjustment associated with using the book value
24 capitalization, is as follows:
10
Discounted Cash Flow (DCF) D0 /P0 x (1+0.5g) + g + lev. = k
Woolridge Water Group 3.5% x 1.03200 + 6.40% + 1.03% =11.04%
1 Q. Please comment on Mr. O'Donnell's growth rate proposal.
2 A. The growth rate proposed by Mr. O'Donnell is 6.00%. Unfortunately, this growth rate
3 contains a downward bias because he erroneously factored historical growth rates into
4 his analysis. His approach is incorrect for the reasons previously given, namely (i)
5 historical performance is already considered by analysts when making their forecasts
6 and (ii) the negative historical growth rates should not be given weight. If the negative
7 historical growth rates from Yahoo Finance are removed from Mr. O'Donnell's analysis,
8 the average analysts' growth rate is 7.08%. Hence, his growth rate must be increased
9 from 6% to 7% to reasonably represent investors' expectations for the water
10 companies.
11 Q. What would be the DCF result using the forecasts of earnings per share growth?
12 A. As shown on page 1 of Schedule 2 of OTS Exhibit No. 1, that result would be:
D/P + g + lev. = k
Water Group 3.57% + 7.00% + 1.03% = 11.60%
Mr. O'Donnell asserts that your DCF growth rate is overstated. Please respond.
As shown by the data presented on Schedule 5 of OTS Exhibit No. 1, the average of
growth rate indicators, excluding dividend per share and book value per share values,
is 7.42% (8.19% + 6.18% + 8.92% + 7.83% + 6.00% = 37.12% + 5). which amply
supports the 7% growth rate that I used in my testimony.
Leverage Adiustment
Please respond to the Dr. Woolridge's criticism of your leverage adjustment.
20 A. As in many (but not ail) prior cases, I have proposed an adjustment to reflect the
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difference in risk attributed to changes in leverage that occur when the book value
capital structure, rather than the market value capital structure, is used to compute the
weighted average cost of capital. This modification to the DCF model must be
recognized in order to make the DCF results relevant to the book value capital
structure.
Is Dr. Woolridge's challenge to your leverage adjustment well founded?
No. t am somewhat surprised by Dr. Woolridge's challenge to my leverage adjustment.
In a book that he co-authored, Dr. Woolridge noted:
Market professionals always use the market value of common stock when they examine the capitalization of the corporation. As we will see in valuation examples, the market value of common stock sometimes bears little relationship to its book value. Stock prices are readily available.1
Dr. Woolridge contends that in a recent Aqua Pennsylvania rate case the
Commission denied the leverage adjustment. Please respond.
The fact that the PPUC declined to make a leverage adjustment in the Aqua
Pennsylvania case does not invalidate its use. Rather, the PPUC merely indicated that
the adjustment was optional. The PPUC did not repudiate the leverage adjustment,
but instead arrived at an 11.00% return on equity for Aqua Pennsylvania by providing a
separate return increment for management performance. Just like an increment for
management performance is not adopted in all rate case decisions, the PPUC seems
to be taking a similar approach to the leverage adjustment.
Do you have any additional comments regarding Dr. Woolridge's comments on
the leverage adjustment?
Yes. Dr. Woolridge has not disputed the fact that there is less financial risk associated
1 Gray, Gary, Cusatis, Patrick J., Woolridge, Randall J. Streetsmart Guide to Valuing a Stock: The Savvy Investor's Key to Beating the Market. Second Edition. New York: McGraw-Hill Companies (2004)
12
1 with a 64.91% (market price-based) equity ratio than there is with a 50.98% (book
2 value-based) equity ratio for my Water Group (see page E-11 of Appendix E that
3 accompanies my direct testimony). Moreover, and as noted previously. Dr. Woolridge
4 has acknowledged in his book that the market value of common equity is the most
5 relevant item for professional investors. Because financial risk increases when the
6 common equity ratio is lower, the cost of equity must likewise increase when used in
7 the ratesetting process.
8 Q. Dr. Woolridge also claims that the leverage adjustment will serve to increase the
9 return for companies with high market-to-book ratios and decrease the returns
10 for companies with low market-to-book ratios. Please respond.
11 A. In making this assertion, Dr. Woolridge neglects to mention that, all else being equal, a
12 company with a higher market-to-book ratio will have a lower dividend yield. The
13 reverse is also true, i.e., lower market-to-book ratios, serve to increase the DCF return.
14 Essentially, the leverage adjustment adds stability since it provides an offset to the
15 relative level of DCF returns.
16 Further, there are many factors that impact the leverage adjustment, including
17 changes in the market capitalization and book capitalization, the components of the
18 yield and growth (noted above), and the overall level of capital costs as revealed by the
19 marginal cost of debt and preferred stock. Although rare, the formulas that I use to
20 compute the leverage adjustment could actually produce a lower adjustment with a
21 higher differential between the market capitalization and book capitalization.
22 Q. Mr. O'Donnell also questions your leverage adjustment by reference to an old
23 Blue Mountain case in which you testified. Please comment.
24 A. The Commission has consistently recognized that the Blue Mountain decision, which is
25 now 30 years old, and the environment in which it was issued, are distinguishable in a
26 number of important respects.
13
1 First, that case was not decided using the DCF method. Rather, the
2 Commission relied heavily on earnings/prices ratios to set the return on equity in the
3 context of a fair value rate base. Second, in its decision on remand, the Commission
4 noted that over a period of years it was relatively easy to discern the trends in market-
5 to-book ratios which, when compared to performance as measured by other financial
6 ratios, can indicate the return levels the Commission must award to assure reasonable
7 access by public utilities to the capital markets. Notably, the trends in market-to-book
8 ratios during that period were substantially different from today. At the time that case
9 was litigated, market-to-book ratios for the broader market generally approximated 1:1.
10 That is to say, market prices in the late 1970s were about equal to book value.
11 Since that time, share prices have moved much higher vis-a-vis their underlying
12 book values. So, while the market-to-book ratio of the DJI approximated 1:1 in the late
13 1970s, today the DJI trades at 4.52:1 of book value. In short, the capital markets today
14 are markedly different than those that existed at the time of the Blue Mountain case. I
15 should also note that, since that time, the Commission has adopted my leverage
16 adjustment to the DCF model on numerous occasions.
17 CAPITAL ASSET PRICING MODEL
18 Q. Do you have concerns regarding the application ofthe CAPM by Dr. Woolridge?
19 A. As a preliminary matter, Dr. Woolridge produced a 7.5% CAPM result for his Water
20 Proxy Group and 7.0% for his Gas Proxy Group. These results are not credible. This
21 is especially true in the circumstance where the average yield on A-rated public utility
22 bonds was 5.71% for the six-months through June, 2010. The opportunity cost of
23 equity must be higher than the cost of debt by a meaningful margin, which is not the
24 case with Dr. Woolridge's CAPM. Dr. Woolridge's CAPM analysis understates the cost
25 of equity for a number of reasons: (i) his use of a wholly unrealistic market premium, (ii)
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1 his failure to use leveraged adjusted betas, and (iii) his failure to make a size
2 adjustment.
3 Q. What is your pr imary object ion to the CAPM as applied by Dr. Woolr idge?
4 A. It appears to me that Dr. Woolridge has substantially misstated the total return for the
5 market as a whole from which he calculates his market premium (i.e., Rm-Rf). The
6 market returns he uses, such as 7.05% (see page 7 of Exhibit JRW-11), cannot
7 possibly be correct. What Dr. Woolridge appears to show on his bar graph on page 7
8 of Exhibit JRW-11 is that the S&P 500 has a DCF return that is comprised of a 1.9%
9 dividend yield and 5.15% (2.5% + 2.65%) growth rate.
10 Q. Is the 7.05% total market return developed by Dr. Woolr idge reasonable?
11 A. No. Any forecast market return below 12% is unreasonable at this time. Current
12 market evidence produces total market returns of:
Dividend Appreciation Total Value Line Yield Potential Return
As of June 25, 2010 2.0% + 13.34% (2) = 15.34%
DCF Result for the S&P 500 Composite
D/P ( 1+.5g ) + g k 2.12% ( 1.0501 ) + 10.02% = 12.25%
where: Price (P) at 30-Jun-2010 = 1030.71
Dividend (D) for 1st Qtr.'10 = 5.46
Dividend (D) annualized = 21.84
Growth (g) First Call EpS = 10.02%
2The estimated median appreciation potential is forecast to be 65% for 3 to 5 years hence. The annual capital gains yield atthe midpoint of the forecast period is 13.34% (i.e., 1.6525 -1).
15
1 The average of the market returns is 13.80% (15.34% + 12.25% = 27.59% - 2). The
2 resulting market premium would be 9.80% using Dr. Woolridge risk-free rate of return
3 of 4.00%, which indicates that his 4.68% market premium is much too low.
4 Q. Are there other reasons to believe that the 7.05% market return determined by
5 Dr. Woolridge is unrealistic?
6 A. Yes. A 7.05% overall return for the market as a whole is less than the DCF return that
7 Dr. Woolridge calculates for his purportedly less risky water and gas groups (see page
8 1 of Exhibit JRW-10). It is simply inconceivable that the return on the stock market as
9 a whole is only 7.05% if the return is 9.1% for his Water Proxy Group and 8.9% for his
10 Gas Proxy Group. It is apparent that his total market return is flawed.
11 Q. Dr, Woolridge and Mr. O'Donnell have also criticized your leverage-adjusted
12 betas. Please respond.
13 A. The betas that I have used are calculated strictly from market values, using a firm's
14 stock price as the dependent variable and the market index as the independent
15 variable. There is no reference to book values in the calculation of betas. Yet, as I
16 have previously explained, the regulatory-determined cost of equity must be adjusted
17 for the difference between the risks implicit in the market-based ROE models versus
18 the financial risk associated with book value capital structure used in ratesetting. The
19 Hamada formula that I utilized to adjust the betas is merely an extension of the
20 Modigliani and Miller formula that I used in connection with my DCF calculations. And,
21 of course, Mr. O'Donnell is off the mark by suggesting that Value Line should publish
22 market-to-book adjusted betas. Contrary to Mr. O'Donnell's apparent suggestion,
23 betas only measure systematic risk, not total investment risk. It is for this very reason
24 that the betas should reflect a leverage adjustment as circumstances warrant.
16
1 Q. Do you have additional concerns regarding Mr. O'Donnell's application of the
2 CAPM?
3 A. Yes. Mr. O'Donnell has incorrectly used the geometric mean to measure historical
4 returns. The theoretical foundation of the CAPM requires that the arithmetic mean be
5 used because it conforms to the single period specification of the model, provides a
6 representation of all probable outcomes and has a measurable variance. The
7 geometric mean, which Mr. O'Donnell employs, consists merely of a rate of return
8 taken from two data points and cannot provide a reasonable representation of the
9 market risk premium in the context of the CAPM. As stated by Ibbotson:
10 Arithmetic Versus Geometric Differences 11 For use as the expected equity risk premium in the CAPM, 12 the arithmetic or simple difference of the arithmetic means 13 of stock market returns and riskless rates is the relevant 14 number. This is because the CAPM is an additive model 15 where the cost of capital is the sum of its parts. Therefore, 16 the CAPM expected equity risk premium must be derived 17 by arithmetic, not geometric, subtraction. 18 19 Arithmetic Versus Geometric Means 20 The expected equity risk premium should always be 21 calculated using the arithmetic mean. The arithmetic mean 22 is the rate of return which, when compounded over multiple 23 periods, gives the mean of the probability distribution of 24 ending wealth values....This makes the arithmetic mean 25 return appropriate for computing the cost of capital. The 26 discount rate that equates expected (mean) future values 27 with the present value of an investment is that investment's 28 cost of capital. The logic of using the discount rate as the 29 cost of capital is reinforced by noting that investors will 30 discount their (mean) ending wealth values from an 31 investment back to the present using the arithmetic mean, 32 for the reason given above. They will therefore require 33 such an expected (mean) return prospectively (that is, in 34 the present looking toward the future) in order to commit 35 their capital to the investment. (Stocks, Bonds, Bills and 36 Inflation - 1996 Yearbook, pages 153-154 37
17
1 Q. If historical market returns are to be considered, how should the S&P Composite
2 Index data be employed?
3 A. A 9.60% historical market return considered by Mr. O'Donnell using geometric means
4 for the S&P 500 cannot possibly be correct given that the expected returns he
5 measured were 12.92% using Value Line data. The historic return using the correct
6 arithmetic mean is 11.7%, which is more realistic given the forecasts noted above. The
7 resulting market return would be 12.31% (12.92% + 11.7% = 24.62% + 2). With this
8 market return, the market premium is 8.41% (12.31% - 3.90%) using Mr. O'Donnell's
9 risk-free rate of return.
10 Q. Dr. Woolridge and Mr. O'Donnell also question the need to further adjust the
11 CAPM results for size differences. Please comment.
12 A. Both Dr. Woolridge and Mr. O'Donnell have relied upon the Wong article to support
13 their positions. But, the Wong article employed data going back into the 1960s.
14 Enormous changes have occurred in the industry since the 1960s that have
15 fundamentally changed the utility business. The Wong article also noted that betas for
16 the non-regulated companies were larger than the betas of the utilities. This, however,
17 is not a revelation, because history shows that utilities generally have lower betas than
18 many other companies. This fact does not invalidate the additional risk associated with
19 small size.
20 The Wong article further concludes that the risk impacts of size cannot be
21 explained in terms of beta. Again, this should not be a surprise. Beta is not the tool
22 that should be employed to make that determination. Indeed, beta is a measure of
23 systematic risk and it does not provide the means to identify the return necessary to
24 compensate for the additional risk of small size. In contrast, the famous Fama/French
25 study (see "The Cross-Section of Expected Stock Returns," The Journal of Finance.
26 June 1992) identified size as a separate factor that helps explain returns. Further, the
18
1 article by Dr. Thomas Zepp3 presented research on water utilities that supports a small
2 firm effect in the utility industry.
3 Q. Have you restated Mr. O'Donnell's CAPM?
4 A. Yes. I have restated his CAPM results as indicated below by correcting his market
5 premium, by reflecting the size adjustment, and by employing the leverage adjusted
6 betas for the Water Group.
Rf + /3 { Rm-Rf ) + size = K
Water Group 3.90% + 0.93 ( 8.41% ) + 0.94% = 12.66%
7 Risk Premium Method
8 Q. Do you have any comments concerning Dr. Woolridge's criticism of the risk
9 premium approach?
10 A. Yes. Concerning his point on pages 73-74 of his direct testimony. Dr. Woolridge
11 seems to imply that use of the base yield in my risk premium analysis that includes A-
12 rated public utility bonds is not correct. He attributes this in part to interest rate risk and
13 default risk that are reflected in the yields on A-rated public utility bonds. These are
14 invalid criticisms because common stock investors are faced with these same risks.
15 Moreover, if the compensation for these risks were removed from the yield on A-rated
16 public utility bonds, then the resulting risk premium would be larger when computed
17 from a smaller base yield.
18 Dr. Woolridge's other criticisms of the historical relationship between stock and
19 bond returns are invalid because: (1) common stock investors are subject to the risk of
20 changing levels of interest rates since a primary determinant of the cost of equity is the
3 Zepp, Thomas M. (2002) "Utilitv stocks and the size effect: revisited". Economics and Finance Quarterly. 43. 578-582.
19
1 level of interest rates (especially for utility stocks), and (2) the credit risk associated
2 with a company's bonds is also a major concern for common stock investors (e.g.,
3 default on a company's bonds would adversely affect the common stockholders).
4 Q. Please address the alphabetic medley of criticisms listed by Dr. Woolridge on
5 pages 76 to 82 of his direct testimony.
6 A. Most of these require only a brief response. As to item (A), (biased historical returns)
l the capital tosses concerning historical bond returns were non-existent for long-term
6 government bonds (used by Dr. Woolridge as a proxy for bond yields). Over the period
9 1926-2008, capital appreciations (rather than capital losses) were: 0.3% as the
10 geometric mean and 0.6% as the arithmetic mean. Hence, his claim of losses is not
11 correct. Dr. Woolridge also does not identify the magnitude of any difference between
12 the published yield and investor expected returns on bonds. With bond portfolio
13 immunization strategies, a desired rate of return can be achieved over a fixed
14 investment horizon when the duration of a bond portfolio equals the investment
15 horizon. Because of strategies such as these, the probability of realizing expected
16 returns on public utility bonds from issuance to maturity is extremely high.
17 Consequently, Dr. Woolridge's reasoning provides no basis to reject my risk premium
18 approach.
19 As to item (B) (arithmetic vs. geometric mean returns). Dr. Woolridge criticizes
20 my use of arithmetic means in applying the risk premium method. However, as stated
2i in the 2003 Yearbook published by Ibbotson Associates:
22 The arithmetic mean is the rate of return which, 23 when compounded over multiple periods, gives the 24 mean of the probability distribution of ending 25 wealth values....This makes the arithmetic mean 26 return appropriate for forecasting, discounting, and 27 computing the cost of capital. The discount rate 28 that equates expected (mean) future values with 29 the present value of an investment is that 30 investment's cost of capital. The logic of using the
20
1 discount rate as the cost of capital is reinforced by 2 noting that investors will discount his expected 3 (mean) ending wealth values from an investment 4 back to the present using the arithmetic mean, for 5 the reason given above. They will, therefore, 6 require such an expected (mean) return 7 prospectively (that is, in the present looking toward 8 the future) to commit his capital to the investment. 9
10 In the 2006 Yearbook, Ibbotson added:
11 A simple example illustrates the difference 12 between geometric and arithmetic means. 13 Suppose $1.00 was invested in a large company 14 stock portfolio that experiences successive annual 15 returns of +50 percent and -50 percent. At the end 16 of the first year, the portfolio is worth $1.50. At the 17 end of the second year, the portfolio is worth 18 $0.75. The annual arithmetic mean is 0.0 percent, 19 whereas the annual geometric mean is -13.4 20 percent. Both are calculated as follows; 21
22 r = - (0.50-0.50) = 0.0, ancf
23
24
A 2
/•« = 0.75 2 - 1 - - 0 . 1 3 4
J 0 0 25 26 The geometric mean is backward-looking, 27 measuring the change in wealth over more than 28 one period. On the other hand, the arithmetic 29 mean better represents a typical performance over 30 single periods. 31 32 In general, the geometric mean for any time period 33 is less than or equal to the arithmetic mean. The 34 two means are equal only for a return series that is 35 constant (i.e., the same return in every period). 36 For a non-constant series, the difference between 37 the two is positively related to the variability or 38 standard deviation of the returns. For example, in 39 Table 6-7, the difference between the arithmetic 40 and geometric mean is much larger for risky large 41 company stocks than it is for nearly riskless 42 Treasury bills. 43 44 As to item (C), Dr. Woolridge points to the relatively high standard deviation of
45 the historically measured risk premium as an indication of possible forecasting error.
21
1 But, this is an incorrect criticism. Since common stocks are more risky than bonds or
2 other low risk investments, the standard deviation should be relatively high. If, as Dr.
3 Woolridge asserts, the common equity risk premium is unreliable because the standard
4 deviation is relatively high, then he is repudiating the basic riskiness of common stocks.
5 As to item (D) (unattainable and allegedly biased historical stock returns), with
6 the proliferation of stock-index mutual funds and exchange-traded funds ("ETF") that
7 are designed to replicate the returns on major indexes, the overall market returns are
8 attainable. Transaction costs associated with both stock-index mutual funds are
9 minimal for low cost managers, such as The Vanguard Group and ETFs can be
10 purchased and sold through discount on-line brokerage accounts. Therefore, Dr.
11 Woolridge's criticisms are misplaced.
12 As to item (E) (company survivorship bias), the survivorship issue is not a valid
13 criticism because the historical returns contain the results of the companies that
14 comprised the index in each year. That is to say, as companies entered and exited the
15 index, the market performance in each year reflected the companies in the index each
16 year. Obviously, Microsoft Corporation had no impact on the S&P 500 return in 1960,
17 nor does Nash-Kelvinator Corporation impact the returns ofthe S&P 500 in 2010. But,
18 these companies did provide returns to investors in the years that they were included in
19 the index.
20 Finally, to item (F) (The "Peso Problem" - U.S. stock market survivorship bias),
21 Dr. Woolridge provides no quantification of the impact of the "peso problem" on the
22 historical return. Just as higher than expected returns may have been experienced in
23 the past, so too lower than expected returns also were experienced. Further, the
24 possibility of "highly improbable returns" (e.g., positive or negative) is the reason that
25 long-time series are used in the risk premium analysis in order to normalize the
26 influence of unusually high or low returns.
22
1 a ooes^sconcuceyour re^aues^ony .
2 A. Yes, it does.
23
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